Returns At Together Pharma (TLV:TGTR) Are On The Way Up

What trends should we look for it we want to identify stocks that can 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Together Pharma's (TLV:TGTR) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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 Together Pharma:

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

0.058 = ₪5.2m ÷ (₪133m - ₪44m) (Based on the trailing twelve months to June 2023).

So, Together Pharma has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Interactive Media and Services industry average of 14%.

View our latest analysis for Together Pharma

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

So How Is Together Pharma's ROCE Trending?

We're delighted to see that Together Pharma is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 5.8% which is a sight for sore eyes. In addition to that, Together Pharma is employing 3,578% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 33% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

In summary, it's great to see that Together Pharma has managed to break into profitability and is continuing to reinvest in its business. And since the stock has dived 93% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

Together Pharma does have some risks, we noticed 3 warning signs (and 2 which are concerning) we think you should know about.

While Together Pharma 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.