Territorial Generation Company No.2 (MCX:TGKB) Will Want To Turn Around Its Return Trends

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at Territorial Generation Company No.2 (MCX:TGKB) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. To calculate this metric for Territorial Generation Company No.2, this is the formula:

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

0.045 = ₽1.9b ÷ (₽66b - ₽25b) (Based on the trailing twelve months to June 2021).

Therefore, Territorial Generation Company No.2 has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 11%.

See our latest analysis for Territorial Generation Company No.2

Historical performance is a great place to start when researching a stock so above you can see the gauge for Territorial Generation Company No.2's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Territorial Generation Company No.2, check out these free graphs here.

What Does the ROCE Trend For Territorial Generation Company No.2 Tell Us?

When we looked at the ROCE trend at Territorial Generation Company No.2, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.5% from 21% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Territorial Generation Company No.2 has decreased its current liabilities to 37% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Territorial Generation Company No.2's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Territorial Generation Company No.2 is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 96% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing, we've spotted 1 warning sign facing Territorial Generation Company No.2 that you might find interesting.

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.