This analysis is intended to introduce important early concepts to people who are starting to invest and looking to gauge the potential return on investment in Titan Machinery Inc (NASDAQ:TITN).
Purchasing Titan Machinery gives you an ownership stake in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Therefore, looking at how efficiently Titan Machinery is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
Calculating Return On Capital Employed for TITN
As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. We’ll look at Titan Machinery’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. Take a look at the formula box beneath:
ROCE Calculation for TITN
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$1.63m ÷ (US$809.42m – US$394.04m) = 0.39%
TITN’s 0.39% ROCE means that for every $100 you invest, the company creates $0.4. A good ROCE hurdle you should aim for in your investments is 15%, which TITN has missed by a wide margin, meaning the company creates a poor amount of earnings from capital employed.
What is causing this?
Titan Machinery’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Titan Machinery is in an adverse position, but this can change if these factors improve. Because of this, it is important to look beyond the final value of TITN’s ROCE and understand what is happening to the individual components. Looking at the past 3 year period shows us that TITN boosted investor return on capital employed from 0.083%. Similarly, the movement in the earnings variable shows a jump from US$517.00k to US$1.63m whilst capital employed has decreased because of a decreased level of total assets , which means the company has been able to improve ROCE by growing earnings and simultaneously putting less capital to work.
ROCE for TITN investors is below the desired level at the moment, however, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation to determine if an opportunity exists that isn’t made apparent by looking at past data. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate TITN or move on to other alternatives.
- Future Outlook: What are well-informed industry analysts predicting for TITN’s future growth? Take a look at our free research report of analyst consensus for TITN’s outlook.
- Valuation: What is TITN worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether TITN is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.