We Like T.T's (NSE:TTL) Returns And Here's How They're Trending

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in T.T's (NSE:TTL) returns on capital, so let's have a look.

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. The formula for this calculation on T.T is:

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

0.21 = ₹358m ÷ (₹2.7b - ₹1.0b) (Based on the trailing twelve months to March 2022).

So, T.T has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

Check out our latest analysis for T.T

Historical performance is a great place to start when researching a stock so above you can see the gauge for T.T's ROCE against it's prior returns. If you'd like to look at how T.T has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From T.T's ROCE Trend?

You'd find it hard not to be impressed with the ROCE trend at T.T. We found that the returns on capital employed over the last five years have risen by 172%. The company is now earning ₹0.2 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 37% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

In Conclusion...

In the end, T.T has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 24% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to know some of the risks facing T.T we've found 4 warning signs (1 can't be ignored!) that you should be aware of before investing here.

T.T 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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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.