If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. In light of that, when we looked at Tassal Group (ASX:TGR) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Tassal Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.081 = AU$108m ÷ (AU$1.5b - AU$180m) (Based on the trailing twelve months to June 2020).
Therefore, Tassal Group has an ROCE of 8.1%. On its own that's a low return, but compared to the average of 4.4% generated by the Food industry, it's much better.
In the above chart we have measured Tassal Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Tassal Group.
The Trend Of ROCE
The trend of ROCE doesn't look fantastic because it's fallen from 14% five years ago, while the business's capital employed increased by 151%. That being said, Tassal Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Tassal Group probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
The Bottom Line On Tassal Group's ROCE
Bringing it all together, while we're somewhat encouraged by Tassal Group's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 11% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
On a separate note, we've found 2 warning signs for Tassal Group you'll probably want to know about.
While Tassal Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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