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. With that in mind, we've noticed some promising trends at Tekmar Group (LON:TGP) so let's look a bit deeper.
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 Tekmar Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = UK£2.0m ÷ (UK£64m - UK£17m) (Based on the trailing twelve months to March 2020).
So, Tekmar Group has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 12%.
In the above chart we have measured Tekmar Group's 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 Tekmar Group here for free.
How Are Returns Trending?
Tekmar Group has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 4.3% on its capital. And unsurprisingly, like most companies trying to break into the black, Tekmar Group is utilizing 100% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
To the delight of most shareholders, Tekmar Group has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 44% in the last year. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you want to continue researching Tekmar Group, you might be interested to know about the 3 warning signs that our analysis has discovered.
While Tekmar Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. 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.
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