Returns On Capital Are Showing Encouraging Signs At TETRA Technologies (NYSE:TTI)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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, we've noticed some promising trends at TETRA Technologies (NYSE:TTI) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for TETRA Technologies:

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

0.12 = US$46m ÷ (US$501m - US$119m) (Based on the trailing twelve months to September 2024).

Therefore, TETRA Technologies has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 10% generated by the Energy Services industry.

See our latest analysis for TETRA Technologies

In the above chart we have measured TETRA Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for TETRA Technologies .

What The Trend Of ROCE Can Tell Us

You'd find it hard not to be impressed with the ROCE trend at TETRA Technologies. The figures show that over the last five years, returns on capital have grown by 277%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, TETRA Technologies appears to been achieving more with less, since the business is using 68% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

What We Can Learn From TETRA Technologies' ROCE

In a nutshell, we're pleased to see that TETRA Technologies has been able to generate higher returns from less capital. Since the stock has returned a staggering 144% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for TETRA Technologies (of which 1 makes us a bit uncomfortable!) that you should know about.

While TETRA Technologies 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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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.