Be Wary Of Reclaims Global (Catalist:NEX) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Reclaims Global (Catalist:NEX) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Reclaims Global is:

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

0.068 = S$2.1m ÷ (S$36m - S$4.6m) (Based on the trailing twelve months to July 2023).

Thus, Reclaims Global has an ROCE of 6.8%. On its own, that's a low figure but it's around the 7.8% average generated by the Commercial Services industry.

See our latest analysis for Reclaims Global

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Reclaims Global has performed in the past in other metrics, you can view this free graph of Reclaims Global's past earnings, revenue and cash flow.

So How Is Reclaims Global's ROCE Trending?

When we looked at the ROCE trend at Reclaims Global, we didn't gain much confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 6.8%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Reclaims Global has done well to pay down its current liabilities to 13% of total assets. That could partly explain why the ROCE has dropped. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Reclaims Global have fallen, meanwhile the business is employing more capital than it was five years ago. Investors must expect better things on the horizon though because the stock has risen 15% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Reclaims Global does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is potentially serious...

While Reclaims Global 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.

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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.