Returns On Capital At Turners Automotive Group (NZSE:TRA) Paint An Interesting Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Turners Automotive Group (NZSE:TRA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Turners Automotive Group is:

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

0.056 = NZ$38m ÷ (NZ$686m - NZ$3.5m) (Based on the trailing twelve months to September 2020).

Therefore, Turners Automotive Group has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 14%.

See our latest analysis for Turners Automotive Group

In the above chart we have measured Turners Automotive Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Turners Automotive Group here for free.

What Can We Tell From Turners Automotive Group's ROCE Trend?

On the surface, the trend of ROCE at Turners Automotive Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.6% from 9.4% five years ago. However it looks like Turners Automotive Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Turners Automotive Group's ROCE

To conclude, we've found that Turners Automotive Group is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 42% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we found 2 warning signs for Turners Automotive Group (1 is concerning) you should be aware of.

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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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