Returns on Capital Paint A Bright Future For Tubos Reunidos (BME:TRG)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in Tubos Reunidos' (BME:TRG) returns on capital, so let's have a look.

Understanding 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 Tubos Reunidos:

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

0.30 = €121m ÷ (€588m - €183m) (Based on the trailing twelve months to June 2023).

Thus, Tubos Reunidos has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

Check out our latest analysis for Tubos Reunidos

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tubos Reunidos' ROCE against it's prior returns. If you'd like to look at how Tubos Reunidos has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Tubos Reunidos' ROCE Trend?

Shareholders will be relieved that Tubos Reunidos has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 30% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line On Tubos Reunidos' ROCE

In summary, we're delighted to see that Tubos Reunidos has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 185% 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 Tubos Reunidos can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 2 warning signs with Tubos Reunidos (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

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.