Returns On Capital Are A Standout For TPC Consolidated (ASX:TPC)

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of TPC Consolidated (ASX:TPC) looks great, so lets see what the trend can tell us.

Understanding 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. The formula for this calculation on TPC Consolidated is:

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

0.23 = AU$4.1m ÷ (AU$32m - AU$14m) (Based on the trailing twelve months to June 2021).

Thus, TPC Consolidated has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 5.2% earned by companies in a similar industry.

Check out our latest analysis for TPC Consolidated

Historical performance is a great place to start when researching a stock so above you can see the gauge for TPC Consolidated's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of TPC Consolidated, check out these free graphs here.

What Does the ROCE Trend For TPC Consolidated Tell Us?

TPC Consolidated has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 23% which is a sight for sore eyes. Not only that, but the company is utilizing 646% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, TPC Consolidated has decreased current liabilities to 45% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

In Conclusion...

Overall, TPC Consolidated gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to continue researching TPC Consolidated, you might be interested to know about the 2 warning signs that our analysis has discovered.

TPC Consolidated 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.
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