The Trend Of High Returns At Transtema Group (STO:TRANS) Has Us Very Interested

There are a few key trends to look for if we want to identify the next multi-bagger. 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. With that in mind, the ROCE of Transtema Group (STO:TRANS) looks great, so lets see what the trend can tell us.

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 Transtema Group, this is the formula:

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

0.33 = kr124m ÷ (kr860m - kr483m) (Based on the trailing twelve months to December 2021).

Thus, Transtema Group has an ROCE of 33%. That's a fantastic return and not only that, it outpaces the average of 8.9% earned by companies in a similar industry.

See our latest analysis for Transtema Group

In the above chart we have measured Transtema Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Transtema Group's ROCE Trend?

We like the trends that we're seeing from Transtema Group. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 33%. Basically the business is earning more per dollar of capital invested and in addition to that, 151% more capital is being employed now too. So we're very much inspired by what we're seeing at Transtema Group thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Transtema Group has a current liabilities to total assets ratio of 56%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

To sum it up, Transtema Group has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Astute investors may have an opportunity here because the stock has declined 44% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One final note, you should learn about the 2 warning signs we've spotted with Transtema Group (including 1 which shouldn't be ignored) .

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.