What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Reynolds Consumer Products (NASDAQ:REYN), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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 Reynolds Consumer Products is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = US$419m ÷ (US$4.9b - US$465m) (Based on the trailing twelve months to June 2023).
Thus, Reynolds Consumer Products has an ROCE of 9.5%. Ultimately, that's a low return and it under-performs the Household Products industry average of 15%.
See our latest analysis for Reynolds Consumer Products
Above you can see how the current ROCE for Reynolds Consumer Products compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Reynolds Consumer Products, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.5% from 16% 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a related note, Reynolds Consumer Products has decreased its current liabilities to 9.5% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by Reynolds Consumer Products' reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last three years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Reynolds Consumer Products has the makings of a multi-bagger.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Reynolds Consumer Products (of which 1 is significant!) that you should know about.
While Reynolds Consumer Products isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.