The Return Trends At Teixeira Duarte (ELI:TDSA) Look Promising

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Teixeira Duarte (ELI:TDSA) and its trend of ROCE, we really liked what we saw.

What Is 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 Teixeira Duarte, this is the formula:

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

0.024 = €21m ÷ (€1.5b - €652m) (Based on the trailing twelve months to June 2024).

So, Teixeira Duarte has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 11%.

See our latest analysis for Teixeira Duarte

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

The Trend Of ROCE

Like most people, we're pleased that Teixeira Duarte is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 2.4% on their capital employed. In regards to capital employed, Teixeira Duarte is using 36% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Teixeira Duarte could be selling under-performing assets since the ROCE is improving.

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. Essentially the business now has suppliers or short-term creditors funding about 43% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Teixeira Duarte's ROCE

From what we've seen above, Teixeira Duarte has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 39% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Teixeira Duarte (of which 2 don't sit too well with us!) that you should know about.

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.