Returns On Capital Are Showing Encouraging Signs At TotalEnergies (EPA:TTE)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Speaking of which, we noticed some great changes in TotalEnergies' (EPA:TTE) returns on capital, so let's have 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. To calculate this metric for TotalEnergies, this is the formula:

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

0.16 = US$32b ÷ (US$284b - US$89b) (Based on the trailing twelve months to December 2023).

Therefore, TotalEnergies has an ROCE of 16%. By itself that's a normal return on capital and it's in line with the industry's average returns of 16%.

See our latest analysis for TotalEnergies

In the above chart we have measured TotalEnergies' 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 TotalEnergies for free.

What Can We Tell From TotalEnergies' ROCE Trend?

TotalEnergies has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 74% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line On TotalEnergies' ROCE

In summary, we're delighted to see that TotalEnergies has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 65% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if TotalEnergies can keep these trends up, it could have a bright future ahead.

If you want to continue researching TotalEnergies, you might be interested to know about the 1 warning sign that our analysis has discovered.

While TotalEnergies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.