Investors Shouldn't Overlook TORM's (CPH:TRMD A) Impressive Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at TORM's (CPH:TRMD A) look very promising so lets take a look.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for TORM:

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

0.22 = US$686m ÷ (US$3.4b - US$281m) (Based on the trailing twelve months to September 2024).

Thus, TORM has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 10%.

See our latest analysis for TORM

In the above chart we have measured TORM's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering TORM for free.

What Does the ROCE Trend For TORM Tell Us?

TORM is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 22%. The amount of capital employed has increased too, by 90%. So we're very much inspired by what we're seeing at TORM thanks to its ability to profitably reinvest capital.

The Bottom Line

All in all, it's terrific to see that TORM is reaping the rewards from prior investments and is growing its capital base. And a remarkable 228% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if TORM can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for TORM (of which 1 is a bit unpleasant!) that you should know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.