Capital Investment Trends At Troax Group (STO:TROAX) Look Strong

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Troax Group's (STO:TROAX) ROCE trend, we were very happy with 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. To calculate this metric for Troax Group, this is the formula:

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

0.20 = €51m ÷ (€296m - €47m) (Based on the trailing twelve months to September 2022).

Therefore, Troax Group has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Machinery industry average of 14%.

Check out the opportunities and risks within the SE Machinery industry.

Above you can see how the current ROCE for Troax Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Troax Group here for free.

What Does the ROCE Trend For Troax Group Tell Us?

Troax Group deserves to be commended in regards to it's returns. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 71% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Troax Group can keep this up, we'd be very optimistic about its future.

What We Can Learn From Troax Group's ROCE

Troax Group has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And long term investors would be thrilled with the 110% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

Troax Group does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.