Total Transport Systems (NSE:TOTAL) Will Be Hoping To Turn Its Returns On Capital Around

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Total Transport Systems (NSE:TOTAL) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 Total Transport Systems is:

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

0.12 = ₹97m ÷ (₹1.2b - ₹412m) (Based on the trailing twelve months to June 2023).

So, Total Transport Systems has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 14% generated by the Logistics industry.

See our latest analysis for Total Transport Systems

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

What Does the ROCE Trend For Total Transport Systems Tell Us?

In terms of Total Transport Systems' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 12% from 25% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Total Transport Systems' ROCE

In summary, we're somewhat concerned by Total Transport Systems' diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 323%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Like most companies, Total Transport Systems does come with some risks, and we've found 4 warning signs that you should be aware of.

While Total Transport Systems 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.