Train Alliance Sweden (STO:TRAIN B) Is Looking To Continue Growing Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Train Alliance Sweden (STO:TRAIN B) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Train Alliance Sweden:

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

0.079 = kr121m ÷ (kr1.6b - kr35m) (Based on the trailing twelve months to March 2023).

Therefore, Train Alliance Sweden has an ROCE of 7.9%. Ultimately, that's a low return and it under-performs the Construction industry average of 11%.

View our latest analysis for Train Alliance Sweden

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Train Alliance Sweden, check out these free graphs here.

SWOT Analysis for Train Alliance Sweden

So How Is Train Alliance Sweden's ROCE Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 7.9%. The amount of capital employed has increased too, by 218%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Train Alliance Sweden has decreased current liabilities to 2.2% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

In Conclusion...

All in all, it's terrific to see that Train Alliance Sweden is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 59% over the last three years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 4 warning signs with Train Alliance Sweden (at least 3 which are concerning) , and understanding these would certainly be useful.

While Train Alliance Sweden may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.