Should You Be Impressed By Teqnion's (STO:TEQ) Returns on Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Having said that, from a first glance at Teqnion (STO:TEQ) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Teqnion:

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

0.12 = kr45m ÷ (kr524m - kr153m) (Based on the trailing twelve months to September 2020).

Thus, Teqnion has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Trade Distributors industry average of 13%.

Check out our latest analysis for Teqnion

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

What Can We Tell From Teqnion's ROCE Trend?

When we looked at the ROCE trend at Teqnion, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 12% from 23% four 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Teqnion's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Teqnion. And the stock has followed suit returning a meaningful 93% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, Teqnion does come with some risks, and we've found 3 warning signs that you should be aware of.

While Teqnion isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

When trading Teqnion or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.