Tessenderlo Group (EBR:TESB) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after briefly looking over the numbers, we don't think Tessenderlo Group (EBR:TESB) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Tessenderlo Group, this is the formula:

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

0.019 = €45m ÷ (€2.9b - €600m) (Based on the trailing twelve months to December 2024).

Therefore, Tessenderlo Group has an ROCE of 1.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 1.9%.

See our latest analysis for Tessenderlo Group

In the above chart we have measured Tessenderlo 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 analyst report for Tessenderlo Group .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Tessenderlo Group doesn't inspire confidence. To be more specific, ROCE has fallen from 8.7% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Tessenderlo Group is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 7.2% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Tessenderlo Group does have some risks though, and we've spotted 3 warning signs for Tessenderlo Group that you might be interested in.

While Tessenderlo Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.