We Like These Underlying Trends At Retractable Technologies (NYSEMKT:RVP)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. With that in mind, we've noticed some promising trends at Retractable Technologies (NYSEMKT:RVP) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Retractable Technologies:

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

0.12 = US$4.3m ÷ (US$47m - US$11m) (Based on the trailing twelve months to June 2020).

So, Retractable Technologies has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Medical Equipment industry.

View our latest analysis for Retractable Technologies

Historical performance is a great place to start when researching a stock so above you can see the gauge for Retractable Technologies' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Retractable Technologies, check out these free graphs here.

So How Is Retractable Technologies' ROCE Trending?

Retractable Technologies has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 12% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

In Conclusion...

To bring it all together, Retractable Technologies has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 76% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, Retractable Technologies does come with some risks, and we've found 3 warning signs that you should be aware of.

While Retractable Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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