Investors Should Be Encouraged By Tekcapital's (LON:TEK) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Speaking of which, we noticed some great changes in Tekcapital's (LON:TEK) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Tekcapital is:

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

0.23 = US$7.7m ÷ (US$33m - US$403k) (Based on the trailing twelve months to November 2020).

Thus, Tekcapital has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Professional Services industry average of 13%.

Check out our latest analysis for Tekcapital

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tekcapital's ROCE against it's prior returns. If you're interested in investigating Tekcapital's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Tekcapital's ROCE Trend?

We're delighted to see that Tekcapital is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 23% on its capital. Not only that, but the company is utilizing 782% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In Conclusion...

In summary, it's great to see that Tekcapital has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 66% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Tekcapital does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those can't be ignored...

Tekcapital is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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