In This Article:
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Robert Walters (LON:RWA) and its ROCE trend, we weren't exactly thrilled.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Robert Walters is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = UK£26m ÷ (UK£416m - UK£187m) (Based on the trailing twelve months to December 2023).
Therefore, Robert Walters has an ROCE of 12%. In absolute terms, that's a pretty standard return but compared to the Professional Services industry average it falls behind.
See our latest analysis for Robert Walters
In the above chart we have measured Robert Walters' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Robert Walters .
The Trend Of ROCE
When we looked at the ROCE trend at Robert Walters, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 12% from 32% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
On a side note, Robert Walters has done well to pay down its current liabilities to 45% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 45% is still pretty high, so those risks are still somewhat prevalent.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by Robert Walters' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 11% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.