Stock Analysis

Returns on Capital Paint A Bright Future For Toromont Industries (TSE:TIH)

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There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Toromont Industries' (TSE:TIH) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Toromont Industries is:

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

0.20 = CA$624m ÷ (CA$4.2b - CA$1.1b) (Based on the trailing twelve months to December 2022).

Therefore, Toromont Industries has an ROCE of 20%. On its own that's a fantastic return on capital, though it's the same as the Trade Distributors industry average of 20%.

View our latest analysis for Toromont Industries

TSX:TIH Return on Capital Employed March 22nd 2023

In the above chart we have measured Toromont Industries' 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 report for Toromont Industries.

How Are Returns Trending?

The trends we've noticed at Toromont Industries are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 20%. 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 45%. So we're very much inspired by what we're seeing at Toromont Industries thanks to its ability to profitably reinvest capital.

What We Can Learn From Toromont Industries' ROCE

All in all, it's terrific to see that Toromont Industries is reaping the rewards from prior investments and is growing its capital base. And a remarkable 111% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

Toromont Industries does have some risks though, and we've spotted 1 warning sign for Toromont Industries that you might be interested in.

Toromont Industries 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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