Will Tetra Tech (NASDAQ:TTEK) Multiply In Value Going Forward?

By
Simply Wall St
Published
March 08, 2021
NasdaqGS:TTEK
Source: Shutterstock

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, the ROCE of Tetra Tech (NASDAQ:TTEK) looks decent, right now, so lets see what the trend of returns can tell us.

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. Analysts use this formula to calculate it for Tetra Tech:

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

0.15 = US$246m ÷ (US$2.4b - US$755m) (Based on the trailing twelve months to December 2020).

Therefore, Tetra Tech has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 10% generated by the Commercial Services industry.

Check out our latest analysis for Tetra Tech

roce
NasdaqGS:TTEK Return on Capital Employed March 8th 2021

In the above chart we have measured Tetra Tech'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 Tetra Tech here for free.

So How Is Tetra Tech's ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 47% in that time. 15% is a pretty standard return, and it provides some comfort knowing that Tetra Tech has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Our Take On Tetra Tech's ROCE

To sum it up, Tetra Tech has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 370% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you'd like to know about the risks facing Tetra Tech, we've discovered 1 warning sign that you should be aware of.

While Tetra Tech 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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