What Do The Returns At TradeDoubler (STO:TRAD) Mean Going Forward?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at TradeDoubler (STO:TRAD) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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 TradeDoubler, this is the formula:

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

0.056 = kr20m ÷ (kr754m - kr393m) (Based on the trailing twelve months to September 2020).

So, TradeDoubler has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Media industry average of 8.9%.

View our latest analysis for TradeDoubler

Historical performance is a great place to start when researching a stock so above you can see the gauge for TradeDoubler's ROCE against it's prior returns. If you'd like to look at how TradeDoubler 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 TradeDoubler's ROCE Trend?

We're delighted to see that TradeDoubler is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 44% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. TradeDoubler could be selling under-performing assets since the ROCE is improving.

On a side note, TradeDoubler's current liabilities are still rather high at 52% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In the end, TradeDoubler has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 50% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know about the risks facing TradeDoubler, we've discovered 2 warning signs that you should be aware of.

While TradeDoubler 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. 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.
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