Stock Analysis

Tribal Group (LON:TRB) Is Investing Its Capital With Increasing Efficiency

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AIM:TRB
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So when we looked at the ROCE trend of Tribal Group (LON:TRB) we really liked what we saw.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Tribal Group:

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

0.20 = UK£9.0m ÷ (UK£85m - UK£41m) (Based on the trailing twelve months to December 2020).

Thus, Tribal Group has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Consumer Services industry average of 13%.

View our latest analysis for Tribal Group

roce
AIM:TRB Return on Capital Employed March 23rd 2021

Above you can see how the current ROCE for Tribal Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Tribal Group.

How Are Returns Trending?

Tribal Group has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 648% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

Another thing to note, Tribal Group has a high ratio of current liabilities to total assets of 48%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Tribal Group's ROCE

To bring it all together, Tribal Group has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 204% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we found 3 warning signs for Tribal Group (1 shouldn't be ignored) you should be aware of.

Tribal Group 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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