Many Would Be Envious Of T&S Group's (TSE:4055) Excellent Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. That's why when we briefly looked at T&S Group's (TSE:4055) ROCE trend, we were very happy with what we saw.

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Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on T&S Group is:

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

0.25 = JP¥624m ÷ (JP¥2.9b - JP¥424m) (Based on the trailing twelve months to September 2024).

Therefore, T&S Group has an ROCE of 25%. In absolute terms that's a great return and it's even better than the IT industry average of 15%.

See our latest analysis for T&S Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for T&S Group'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 T&S Group.

What Does the ROCE Trend For T&S Group Tell Us?

It's hard not to be impressed by T&S Group's returns on capital. Over the past three years, ROCE has remained relatively flat at around 25% and the business has deployed 69% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

The Bottom Line On T&S Group's ROCE

In summary, we're delighted to see that T&S Group has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. What's surprising though is that the stock has collapsed 75% over the last five years, so there might be other areas of the business hurting its prospects. So in light of that'd we think it's worthwhile looking further into this stock to see if there's any areas for concern.

T&S Group does have some risks though, and we've spotted 3 warning signs for T&S Group that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.