What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. That's why when we briefly looked at TerraVest Industries' (TSE:TVK) ROCE trend, we were pretty happy with what we saw.
What is 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. The formula for this calculation on TerraVest Industries is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = CA$34m ÷ (CA$312m - CA$57m) (Based on the trailing twelve months to June 2020).
Thus, TerraVest Industries has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 7.5% generated by the Energy Services industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for TerraVest Industries' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of TerraVest Industries, check out these free graphs here.
What Does the ROCE Trend For TerraVest Industries Tell Us?
While the returns on capital are good, they haven't moved much. The company has employed 75% more capital in the last five years, and the returns on that capital have remained stable at 13%. 13% is a pretty standard return, and it provides some comfort knowing that TerraVest 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.
The Bottom Line On TerraVest Industries' ROCE
To sum it up, TerraVest Industries has simply been reinvesting capital steadily, at those decent rates of return. On top of that, the stock has rewarded shareholders with a remarkable 219% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
If you want to continue researching TerraVest Industries, you might be interested to know about the 4 warning signs that our analysis has discovered.
While TerraVest Industries 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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