Returns Are Gaining Momentum At Tigo Energy (NASDAQ:TYGO)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So when we looked at Tigo Energy (NASDAQ:TYGO) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Tigo Energy is:

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

0.16 = US$21m ÷ (US$195m - US$67m) (Based on the trailing twelve months to June 2023).

Thus, Tigo Energy has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 13% it's much better.

View our latest analysis for Tigo Energy

In the above chart we have measured Tigo Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Tigo Energy here for free.

So How Is Tigo Energy's ROCE Trending?

Tigo Energy has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses one year ago, but now it's earning 16% which is a sight for sore eyes. In addition to that, Tigo Energy is employing 317% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, Tigo Energy has decreased current liabilities to 34% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On Tigo Energy's ROCE

Overall, Tigo Energy gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Given the stock has declined 21% in the last year, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Tigo Energy does have some risks though, and we've spotted 2 warning signs for Tigo Energy that you might be interested in.

While Tigo Energy 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.

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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.