The Trends At RPM Automotive Group (ASX:RPM) That You Should Know About

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at RPM Automotive Group (ASX:RPM), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for RPM Automotive Group:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.062 = AU$1.4m ÷ (AU$33m - AU$10m) (Based on the trailing twelve months to June 2020).

Thus, RPM Automotive Group has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 15%.

View our latest analysis for RPM Automotive Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for RPM Automotive Group's ROCE against it's prior returns. If you'd like to look at how RPM Automotive Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For RPM Automotive Group Tell Us?

The returns on capital haven't changed much for RPM Automotive Group in recent years. The company has consistently earned 6.2% for the last four years, and the capital employed within the business has risen 609% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

One more thing to note, even though ROCE has remained relatively flat over the last four years, the reduction in current liabilities to 31% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

Long story short, while RPM Automotive Group has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 47% over the last year. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

RPM Automotive Group does have some risks, we noticed 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

While RPM Automotive Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

This article by Simply Wall St is general in nature. 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.

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