Toromont Industries (TSE:TIH) Hasn't Managed To Accelerate Its Returns

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Toromont Industries' (TSE:TIH) trend of ROCE, we liked 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. The formula for this calculation on Toromont Industries is:

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

0.19 = CA$682m ÷ (CA$4.7b - CA$1.1b) (Based on the trailing twelve months to June 2024).

Therefore, Toromont Industries has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 13% generated by the Trade Distributors industry.

See our latest analysis for Toromont Industries

Above you can see how the current ROCE for Toromont Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Toromont Industries .

How Are Returns Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 65% more capital in the last five years, and the returns on that capital have remained stable at 19%. 19% is a pretty standard return, and it provides some comfort knowing that Toromont Industries has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Toromont Industries has done well to reduce current liabilities to 23% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

To sum it up, Toromont Industries has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 114% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you're still interested in Toromont Industries it's worth checking out our FREE intrinsic value approximation for TIH to see if it's trading at an attractive price in other respects.

While Toromont Industries isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.