The Returns At Tomra Systems (OB:TOM) Aren't Growing

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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.

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. Analysts use this formula to calculate it for Tomra Systems:

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

0.19 = kr1.6b ÷ (kr12b - kr3.5b) (Based on the trailing twelve months to December 2021).

Therefore, Tomra Systems has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 9.6% it's much better.

Check out our latest analysis for Tomra Systems

In the above chart we have measured Tomra Systems' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Tomra Systems.

What The Trend Of ROCE Can Tell Us

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 19% and the business has deployed 50% more capital into its operations. 19% is a pretty standard return, and it provides some comfort knowing that Tomra Systems has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line

To sum it up, Tomra Systems has simply been reinvesting capital steadily, at those decent rates of return. On top of that, the stock has rewarded shareholders with a remarkable 369% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we've found 1 warning sign for Tomra Systems that we think you should be aware of.

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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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.