Returns On Capital Are Showing Encouraging Signs At Transat A.T (TSE:TRZ)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at Transat A.T (TSE:TRZ) and its trend of ROCE, we really liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Transat A.T:

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

0.031 = CA$33m ÷ (CA$2.6b - CA$1.5b) (Based on the trailing twelve months to April 2024).

Therefore, Transat A.T has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Airlines industry average of 8.4%.

See our latest analysis for Transat A.T

Above you can see how the current ROCE for Transat A.T compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Transat A.T .

How Are Returns Trending?

The fact that Transat A.T is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 3.1% on its capital. Not only that, but the company is utilizing 60% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, Transat A.T's current liabilities are still rather high at 58% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Transat A.T's ROCE

To the delight of most shareholders, Transat A.T has now broken into profitability. And since the stock has dived 89% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

Transat A.T does have some risks, we noticed 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

While Transat A.T 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.