The Returns At Technical Publications Service (BIT:TPS) Provide Us With Signs Of What's To Come

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Technical Publications Service (BIT:TPS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Technical Publications Service is:

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

0.13 = €3.2m ÷ (€35m - €9.0m) (Based on the trailing twelve months to June 2020).

So, Technical Publications Service has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Aerospace & Defense industry.

See our latest analysis for Technical Publications Service

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

The Trend Of ROCE

In terms of Technical Publications Service's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 13% from 50% four years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Technical Publications Service has done well to pay down its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Technical Publications Service's ROCE

While returns have fallen for Technical Publications Service in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 26% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Technical Publications Service does have some risks though, and we've spotted 2 warning signs for Technical Publications Service that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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