Here’s what to do with the decelerating rate of return of Republic Services (NYSE: RSG)

There are a few key trends to look for if we are to identify the next multi-bagger. First, we would like to identify a growth to return to on capital employed (ROCE) and at the same time, a based capital employed. This shows us that it is a composing machine, capable of continually reinvesting its profits into the business and generating higher returns. However, after investigation Republic Services (NYSE: RSG), we don’t think current trends fit the mold of a multi-bagger.

Understanding Return on Capital Employed (ROCE)

For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. To calculate this metric for Republic Services, here is the formula:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.094 = $ 2.1 billion ÷ ($ 24 billion – $ 2.3 billion) (Based on the last twelve months up to September 2021).

Thereby, Republic Services has a ROCE of 9.4%. Even though it is in line with the industry average of 8.8%, it is still a poor performance in and of itself.

Check out our latest analysis for Republic Services

NYSE: RSG Return on Capital Employed December 14, 2021

In the graph above, we’ve measured Republic Services’ past ROCE versus past performance, but arguably the future is more important. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.

The ROCE trend

Things have been fairly stable at Republic Services, with their capital employed and returns on that capital remaining roughly the same over the past five years. Companies with these characteristics tend to be mature and stable operations as they are past the growth phase. So unless we see a substantial change at Republic Services in terms of ROCE and additional investments, we won’t be holding our breath that this is a multi-bagger. With fewer investment opportunities, it makes sense for Republic Services to pay out 39% of its profits to shareholders. Unless companies have very good growth opportunities, they will generally return money to shareholders.

What we can learn from Republic Services ROCE

In a nutshell, Republic Services has walked with the same returns for the same amount of capital over the past five years. Investors must think there are better things to come because the stock took it out of the park, offering a 161% gain to shareholders who have owned in the past five years. However, unless these underlying trends turn more positive, our hopes would not be too high.

One more thing, we spotted 2 warning signs facing Republic Services that you might find interesting.

For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.