Returns At Tectona (TLV:TECT) Are On The Way Up

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Tectona (TLV:TECT) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Tectona:

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

0.057 = US$705k ÷ (US$13m - US$902k) (Based on the trailing twelve months to June 2024).

Therefore, Tectona has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Software industry average of 17%.

See our latest analysis for Tectona

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tectona's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Tectona.

The Trend Of ROCE

We're delighted to see that Tectona 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 5.7% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Tectona is utilizing 321% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 6.7%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line

Overall, Tectona gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

One final note, you should learn about the 5 warning signs we've spotted with Tectona (including 2 which are significant) .

While Tectona 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. 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.