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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Reef Casino Trust's (ASX:RCT) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Reef Casino Trust, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = AU$16m ÷ (AU$100m - AU$3.9m) (Based on the trailing twelve months to June 2023).
So, Reef Casino Trust has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 6.2% generated by the Hospitality industry.
View our latest analysis for Reef Casino Trust
Historical performance is a great place to start when researching a stock so above you can see the gauge for Reef Casino Trust's ROCE against it's prior returns. If you'd like to look at how Reef Casino Trust has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Reef Casino Trust's ROCE Trending?
Reef Casino Trust's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 34% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
Our Take On Reef Casino Trust's ROCE
In summary, we're delighted to see that Reef Casino Trust has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 52% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.