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# Titan Machinery Inc (NASDAQ:TITN): Why Return On Capital Employed Is Important

If you purchase a TITN share you are effectively becoming a partner with many other shareholders. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. Your return is tied to TITN’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. 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.

### Titan Machinery’s Return On Capital Employed

When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. 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. TITN’s ROCE is calculated below:

ROCE Calculation for TITN

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = US\$17m ÷ (US\$825m – US\$449m) = 8.0%

The calculation above shows that TITN’s earnings were 8.0% of capital employed. This shows Titan Machinery provides a dull capital return that is below the 15% ROCE that is typically considered to be a strong benchmark. Nevertheless, if TITN is clever with their reinvestments or dividend payments, investors can still grow their capital but may fall behind other more attractive opportunities in the market.

### Why is this the case?

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. If you go back three years, you’ll find that TITN’s ROCE has increased from 4.6%. With this, the current earnings of US\$17m improved from US\$2.3m and the amount of capital employed has deteriorated as a result of a decline in total assets , which means that ROCE has increased as a result of Titan Machinery’s ability to grow earnings in conjunction with increased capital efficiency.

### Next Steps

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. It is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and valuation to determine whether there is potential for return by focusing our attention elsewhere. Titan Machinery’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.

1. 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.
2. 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.
3. 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 editorial-team@simplywallst.com.