There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Titon Holdings (LON:TON), it didn't seem to tick all of these boxes.
What is Return On Capital Employed (ROCE)?
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 Titon Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.036 = UK£602k ÷ (UK£21m - UK£4.2m) (Based on the trailing twelve months to March 2020).
Thus, Titon Holdings has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Building industry average of 5.3%.
In the above chart we have measured Titon Holdings' 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 Titon Holdings.
So How Is Titon Holdings' ROCE Trending?
In terms of Titon Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.6% from 12% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
The Bottom Line On Titon Holdings' ROCE
We're a bit apprehensive about Titon Holdings because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors must expect better things on the horizon though because the stock has risen 10% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
On a separate note, we've found 3 warning signs for Titon Holdings you'll probably want to know about.
While Titon Holdings 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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