Has Grupo Traxión. de (BMV:TRAXIONA) Got What It Takes To Become A Multi-Bagger?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Grupo Traxión. de (BMV:TRAXIONA), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Grupo Traxión. de, this is the formula:

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

0.089 = Mex$1.5b ÷ (Mex$21b - Mex$3.6b) (Based on the trailing twelve months to September 2020).

Thus, Grupo Traxión. de has an ROCE of 8.9%. On its own, that's a low figure but it's around the 7.9% average generated by the Transportation industry.

Check out our latest analysis for Grupo Traxión. de

Above you can see how the current ROCE for Grupo Traxión. de compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Grupo Traxión. de here for free.

What Does the ROCE Trend For Grupo Traxión. de Tell Us?

The returns on capital haven't changed much for Grupo Traxión. de in recent years. The company has consistently earned 8.9% for the last five years, and the capital employed within the business has risen 656% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Grupo Traxión. de's ROCE

Long story short, while Grupo Traxión. de has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 52% over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Grupo Traxión. de does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Grupo Traxión. de isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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