Our Take On The Returns On Capital At TMP Steel (GTSM:6248)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. That's why when we briefly looked at TMP Steel's (GTSM:6248) ROCE trend, we were pretty happy with what we saw.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for TMP Steel:

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

0.12 = NT$102m ÷ (NT$1.3b - NT$423m) (Based on the trailing twelve months to September 2020).

So, TMP Steel has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 3.6% generated by the Metals and Mining industry.

See our latest analysis for TMP Steel

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

While the returns on capital are good, they haven't moved much. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 171% in that time. 12% is a pretty standard return, and it provides some comfort knowing that TMP Steel has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

What We Can Learn From TMP Steel's ROCE

In the end, TMP Steel has proven its ability to adequately reinvest capital at good rates of return. However, over the last five years, the stock has only delivered a 17% return to shareholders who held over that period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

If you'd like to know more about TMP Steel, we've spotted 4 warning signs, and 1 of them shouldn't be ignored.

While TMP Steel 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. 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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