Why We Like The Returns At T.T (NSE:TTL)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in T.T's (NSE:TTL) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for T.T:

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

0.23 = ₹475m ÷ (₹3.6b - ₹1.6b) (Based on the trailing twelve months to September 2021).

Thus, T.T has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Luxury industry average of 13%.

Check out our latest analysis for T.T

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating T.T's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

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 201%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 22% less capital than it was five years ago. T.T may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a separate but related note, it's important to know that T.T has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

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. Since the stock has returned a staggering 103% to shareholders over the last five years, it looks like investors are recognizing these changes. 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 T.T (including 1 which is potentially serious) .

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.