Stock Analysis

Shareholders Would Enjoy A Repeat Of Taiga Building Products' (TSE:TBL) Recent Growth In Returns

TSX:TBL
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. And in light of that, the trends we're seeing at Taiga Building Products' (TSE:TBL) look very promising so lets take 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. Analysts use this formula to calculate it for Taiga Building Products:

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

0.40 = CA$134m ÷ (CA$621m - CA$288m) (Based on the trailing twelve months to March 2021).

Thus, Taiga Building Products has an ROCE of 40%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 15%.

Check out our latest analysis for Taiga Building Products

roce
TSX:TBL Return on Capital Employed May 12th 2021

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 want to delve into the historical earnings, revenue and cash flow of Taiga Building Products, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Taiga Building Products are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 40%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 148%. So we're very much inspired by what we're seeing at Taiga Building Products thanks to its ability to profitably reinvest capital.

On a side note, Taiga Building Products' current liabilities are still rather high at 46% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Taiga Building Products' ROCE

To sum it up, Taiga Building Products has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing Taiga Building Products we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

Taiga Building Products 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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