technotrans (ETR:TTR1) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at technotrans (ETR:TTR1) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for technotrans:

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

0.056 = €6.4m ÷ (€148m - €35m) (Based on the trailing twelve months to December 2020).

Therefore, technotrans has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Machinery industry average of 7.4%.

View our latest analysis for technotrans

In the above chart we have measured technotrans' 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 technotrans.

How Are Returns Trending?

On the surface, the trend of ROCE at technotrans doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.6% from 14% five years ago. However it looks like technotrans might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

In summary, technotrans is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 79% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a separate note, we've found 2 warning signs for technotrans you'll probably want to know about.

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