Toyota Caetano Portugal (ELI:SCT) Is Looking To Continue Growing Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Toyota Caetano Portugal (ELI:SCT) so let's look a bit deeper.

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. To calculate this metric for Toyota Caetano Portugal, this is the formula:

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

0.18 = €32m ÷ (€323m - €141m) (Based on the trailing twelve months to December 2022).

Thus, Toyota Caetano Portugal has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 15% generated by the Auto industry.

See 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 want to delve into the historical earnings, revenue and cash flow of Toyota Caetano Portugal, check out these free graphs here.

What Can We Tell From Toyota Caetano Portugal's ROCE Trend?

Toyota Caetano Portugal has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 103% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a separate but related note, it's important to know that Toyota Caetano Portugal has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Toyota Caetano Portugal's ROCE

As discussed above, Toyota Caetano Portugal appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with a respectable 92% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. 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.

On a final note, we found 2 warning signs for Toyota Caetano Portugal (1 is a bit unpleasant) you should be aware of.

While Toyota Caetano Portugal 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.