We Like These Underlying Return On Capital Trends At TagMaster (STO:TAGM B)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in TagMaster's (STO:TAGM B) returns on capital, so let's have a 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. The formula for this calculation on TagMaster is:

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

0.024 = kr8.2m ÷ (kr444m - kr109m) (Based on the trailing twelve months to June 2024).

Therefore, TagMaster has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Communications industry average of 13%.

View our latest analysis for TagMaster

In the above chart we have measured TagMaster's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering TagMaster for free.

What The Trend Of ROCE Can Tell Us

We're delighted to see that TagMaster is reaping rewards from its investments and has now broken into profitability. The company now earns 2.4% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by TagMaster has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

Our Take On TagMaster's ROCE

To bring it all together, TagMaster has done well to increase the returns it's generating from its capital employed. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing to note, we've identified 3 warning signs with TagMaster and understanding them should be part of your investment process.

While TagMaster isn't earning the highest return, check out this free list of companies that are 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.