Investors Will Want Toyota Caetano Portugal's (ELI:SCT) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. So on that note, Toyota Caetano Portugal (ELI:SCT) looks quite promising in regards to its trends of return on capital.

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 Toyota Caetano Portugal:

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

0.17 = €37m ÷ (€455m - €243m) (Based on the trailing twelve months to December 2023).

Therefore, Toyota Caetano Portugal has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Auto industry average of 16%.

View our latest analysis for Toyota Caetano Portugal

Historical performance is a great place to start when researching a stock so above you can see the gauge for Toyota Caetano Portugal's ROCE against it's prior returns. If you'd like to look at how Toyota Caetano Portugal has performed in the past in other metrics, you can view this free graph of Toyota Caetano Portugal's past earnings, revenue and cash flow.

How Are Returns Trending?

Toyota Caetano Portugal is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 84% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 53% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Toyota Caetano Portugal's ROCE

In summary, we're delighted to see that Toyota Caetano Portugal has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Toyota Caetano Portugal can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 2 warning signs we've spotted with Toyota Caetano Portugal (including 1 which shouldn't be ignored) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.