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If you’re looking for a multibagger, there are a few things to keep in mind. First, you want to identify what is growing. return In addition to capital employed (ROCE) continues to increase base of capital employed. After all, this shows that this is a business that is increasing its profitability and reinvesting its profits.However, when I looked into it, red row (LON:RDW), we believe the current trend is outside the multibagger mold.
What is return on capital employed (ROCE)?
For those who aren’t sure what ROCE is, it measures the amount of pre-tax profit a company can generate from the capital employed in its business. To calculate this metric for Redrow, use the following formula:
Return on Capital Employed = Earnings before interest and tax (EBIT) ÷ (Total assets – Current liabilities)
0.18 = GBP 399 million ÷ (GBP 3.1 billion – GBP 865 million) (Based on the previous 12 months to July 2023).
So, Redrow’s ROCE is 18%. While this is a standard return in itself, it is much better than the 11% produced by the consumer durables industry.
Check out our latest analysis for Redrow.
In the chart above, we measured Redrow’s previous ROCE against its previous performance, but the future is probably more important. If you want to know what analysts are predicting for the future, check out this article. free Redrow report.
ROCE trends
When I looked at the ROCE trends at Redrow, I wasn’t very confident. About five years ago, the return on equity was 23%, but it has since fallen to 18%. However, Redrow appears to be reinvesting for long-term growth. That’s because, although capital employed has increased, the company’s sales haven’t changed much over the past 12 months. It’s worth keeping an eye on the company’s earnings going forward to see if these investments ultimately contribute to its bottom line.
The conclusion is…
In summary, we’re somewhat encouraged by the fact that Redrow is reinvesting in its business, although we recognize that its earnings are shrinking. Unsurprisingly, the share price has only risen 26% in the past five years, which could indicate investors are considering more upside ahead. Therefore, if you are looking for a multibagger, you may want to consider other options.
One last thing to note. two warning signs We found them at Redrow (including one concerning one).
For those who like investing, solid company, check this out free List of companies with strong balance sheets and high return on equity.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
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