Here’s What’s Happening With Returns At Tredegar (NYSE:TG)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Tredegar's (NYSE:TG) returns on capital, so let's have a look.

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. To calculate this metric for Tredegar, this is the formula:

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

0.14 = US$57m ÷ (US$568m - US$147m) (Based on the trailing twelve months to September 2020).

So, Tredegar has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 7.1% it's much better.

See our latest analysis for Tredegar

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Tredegar's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Tredegar has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 54%. The company is now earning US$0.1 per dollar of capital employed. In regards to capital employed, Tredegar appears to been achieving more with less, since the business is using 24% less capital to run its operation. Tredegar may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

What We Can Learn From Tredegar's ROCE

In a nutshell, we're pleased to see that Tredegar has been able to generate higher returns from less capital. Since the stock has returned a solid 76% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to continue researching Tredegar, you might be interested to know about the 2 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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