Techtronic Industries (HKG:669) Is Looking To Continue Growing Its Returns On Capital

By
Simply Wall St
Published
May 19, 2022
SEHK:669
Source: Shutterstock

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Techtronic Industries (HKG:669) looks quite promising in regards to its trends of return on capital.

Understanding 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 Techtronic Industries:

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

0.19 = US$1.2b ÷ (US$13b - US$6.7b) (Based on the trailing twelve months to December 2021).

So, Techtronic Industries has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Machinery industry.

See our latest analysis for Techtronic Industries

roce
SEHK:669 Return on Capital Employed May 19th 2022

In the above chart we have measured Techtronic Industries' 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 Techtronic Industries here for free.

So How Is Techtronic Industries' ROCE Trending?

The trends we've noticed at Techtronic Industries are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 19%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 107%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 51% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

Our Take On Techtronic Industries' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Techtronic Industries has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Techtronic Industries can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Techtronic Industries (of which 1 shouldn't be ignored!) that you should know about.

While Techtronic Industries 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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