Here's What To Make Of Tomra Systems' (OB:TOM) Decelerating Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. With that in mind, the ROCE of Tomra Systems (OB:TOM) looks decent, right now, so lets see what the trend of returns can tell us.

What Is 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. To calculate this metric for Tomra Systems, this is the formula:

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

0.13 = kr1.5b ÷ (kr14b - kr2.2b) (Based on the trailing twelve months to September 2022).

Therefore, Tomra Systems has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 9.3% it's much better.

Check out our latest analysis for Tomra Systems

Above you can see how the current ROCE for Tomra Systems compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Tomra Systems.

What Does the ROCE Trend For Tomra Systems Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 84% more capital in the last five years, and the returns on that capital have remained stable at 13%. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Key Takeaway

The main thing to remember is that Tomra Systems has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 178% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you want to continue researching Tomra Systems, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Tomra Systems 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. 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.