Stock Analysis

The Return Trends At Titan Machinery (NASDAQ:TITN) Look Promising

NasdaqGS:TITN
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Titan Machinery (NASDAQ:TITN) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Titan Machinery is:

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

0.11 = US$58m ÷ (US$839m - US$310m) (Based on the trailing twelve months to July 2021).

Thus, Titan Machinery has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 12% generated by the Trade Distributors industry.

View our latest analysis for Titan Machinery

roce
NasdaqGS:TITN Return on Capital Employed November 4th 2021

Above you can see how the current ROCE for Titan Machinery compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Titan Machinery.

The Trend Of ROCE

Titan Machinery is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 1,499% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

One more thing to note, Titan Machinery has decreased current liabilities to 37% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Key Takeaway

To sum it up, Titan Machinery is collecting higher returns from the same amount of capital, and that's impressive. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Titan Machinery can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 1 warning sign for Titan Machinery you'll probably want to know about.

While Titan Machinery may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Valuation is complex, but we're helping make it simple.

Find out whether Titan Machinery is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.

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