Many Would Be Envious Of TPC Consolidated's (ASX:TPC) Excellent Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at TPC Consolidated's (ASX:TPC) ROCE trend, we were very happy with what we saw.

What Is Return On Capital Employed (ROCE)?

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 TPC Consolidated, this is the formula:

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

0.41 = AU$12m ÷ (AU$57m - AU$26m) (Based on the trailing twelve months to December 2022).

Thus, TPC Consolidated has an ROCE of 41%. That's a fantastic return and not only that, it outpaces the average of 5.2% earned by companies in a similar industry.

See our latest analysis for TPC Consolidated

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're interested in investigating TPC Consolidated's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

TPC Consolidated deserves to be commended in regards to it's returns. The company has employed 1,392% more capital in the last five years, and the returns on that capital have remained stable at 41%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If TPC Consolidated can keep this up, we'd be very optimistic about its future.

On a side note, TPC Consolidated has done well to reduce current liabilities to 47% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. Although because current liabilities are still 47%, some of that risk is still prevalent.

The Bottom Line On TPC Consolidated's ROCE

In summary, we're delighted to see that TPC Consolidated has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 253% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One final note, you should learn about the 3 warning signs we've spotted with TPC Consolidated (including 1 which is concerning) .

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.