Tessin Nordic Holding (STO:TESSIN) Is Looking To Continue Growing Its 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Tessin Nordic Holding (STO:TESSIN) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Tessin Nordic Holding:

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

0.13 = kr30m ÷ (kr266m - kr41m) (Based on the trailing twelve months to September 2022).

So, Tessin Nordic Holding has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 16% generated by the Communications industry.

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

Above you can see how the current ROCE for Tessin Nordic Holding 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 Tessin Nordic Holding here for free.

So How Is Tessin Nordic Holding's ROCE Trending?

We're delighted to see that Tessin Nordic Holding is reaping rewards from its investments and has now broken into profitability. The company now earns 13% on its capital, because one year ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Key Takeaway

To bring it all together, Tessin Nordic Holding has done well to increase the returns it's generating from its capital employed. And since the stock has dived 91% over the last year, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

Tessin Nordic Holding does have some risks, we noticed 4 warning signs (and 2 which are potentially serious) we think you should know about.

While Tessin Nordic Holding 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.