LON:RIO) looks quite promising in regards to its trends of return on capital.” data-reactid=”28″ type=”text”>If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Rio Tinto Group (LON:RIO) looks quite promising in regards to its trends of return on capital.
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. To calculate this metric for Rio Tinto Group, this is the formula:
(Based on the trailing twelve months to June 2020).” data-reactid=”36″ type=”text”>0.17 = US$13b ÷ (US$85b – US$9.4b) (Based on the trailing twelve months to June 2020).
report on analyst forecasts for the company.” data-reactid=”51″ type=”text”>In the above chart we have measured Rio Tinto Group’s prior ROCE against its prior performance, but the future is arguably more important. 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
Rio Tinto Group is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 61% whilst employing roughly the same amount of capital. So it’s likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn’t changed considerably. 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.
The Bottom Line
In summary, we’re delighted to see that Rio Tinto Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 196% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
2 warning signs we’ve spotted with Rio Tinto Group (including 1 which is shouldn’t be ignored) .” data-reactid=”56″ type=”text”>One final note, you should learn about the 2 warning signs we’ve spotted with Rio Tinto Group (including 1 which is shouldn’t be ignored) .
list of companies with good balance sheets and impressive returns on equity.” data-reactid=”57″ type=”text”>If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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.