Why You Should Care About Troax Group's (STO:TROAX) Strong Returns On Capital

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. 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.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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 = €49m ÷ (€285m - €44m) (Based on the trailing twelve months to March 2023).

So, Troax Group has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

Check out our latest analysis for Troax Group

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?

In terms of Troax Group's history of ROCE, it's quite impressive. The company has employed 64% more capital in the last five years, and the returns on that capital have remained stable at 20%. 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.

Our Take On Troax Group's ROCE

In short, we'd argue Troax Group has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 146% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Troax Group does have some risks though, and we've spotted 1 warning sign for Troax Group that you might be interested in.

Troax Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.