Investors Shouldn't Overlook Temple & Webster Group's (ASX:TPW) Impressive Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Temple & Webster Group's (ASX:TPW) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Temple & Webster Group, this is the formula:

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

0.21 = AU$19m ÷ (AU$148m - AU$59m) (Based on the trailing twelve months to June 2021).

So, Temple & Webster Group has an ROCE of 21%. In absolute terms that's a great return but compared to the Online Retail industry average of 28% it falls short.

View our latest analysis for Temple & Webster Group

In the above chart we have measured Temple & Webster Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Temple & Webster Group here for free.

What Can We Tell From Temple & Webster Group's ROCE Trend?

We're delighted to see that Temple & Webster Group is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 21% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Temple & Webster Group is utilizing 419% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Key Takeaway

To the delight of most shareholders, Temple & Webster Group has now broken into profitability. And a remarkable 5,456% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 2 warning signs facing Temple & Webster Group that you might find interesting.

Temple & Webster Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.