TENDALTD (TSE:4198) Knows How To Allocate Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at TENDALTD's (TSE:4198) ROCE trend, we were very happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on TENDALTD is:

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

0.20 = JP¥546m ÷ (JP¥3.9b - JP¥1.1b) (Based on the trailing twelve months to May 2024).

Therefore, TENDALTD has an ROCE of 20%. 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 TENDALTD

Historical performance is a great place to start when researching a stock so above you can see the gauge for TENDALTD'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 TENDALTD.

The Trend Of ROCE

We'd be pretty happy with returns on capital like TENDALTD. The company has employed 298% more capital in the last five years, and the returns on that capital have remained stable at 20%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

In Conclusion...

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. However, over the last three years, the stock has only delivered a 5.3% return to shareholders who held over that period. So to determine if TENDALTD is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

If you'd like to know more about TENDALTD, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

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.