Triumph Group (NYSE:TGI) Might Have The Makings Of A Multi-Bagger

By
Simply Wall St
Published
November 01, 2021
NYSE:TGI
Source: Shutterstock

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Triumph Group's (NYSE:TGI) returns on capital, so let's have a look.

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. To calculate this metric for Triumph Group, this is the formula:

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

0.13 = US$175m ÷ (US$1.9b - US$563m) (Based on the trailing twelve months to June 2021).

Thus, Triumph Group has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Aerospace & Defense industry average of 8.9% it's much better.

See our latest analysis for Triumph Group

roce
NYSE:TGI Return on Capital Employed November 2nd 2021

In the above chart we have measured Triumph Group'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 Triumph Group here for free.

What Can We Tell From Triumph Group's ROCE Trend?

It's great to see that Triumph Group has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 13% which is no doubt a relief for some early shareholders. In regards to capital employed, Triumph Group is using 65% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

In Conclusion...

In summary, it's great to see that Triumph Group has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 13% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One final note, you should learn about the 3 warning signs we've spotted with Triumph Group (including 1 which can't be ignored) .

While Triumph Group 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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