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The Returns On Capital At Trade Desk (NASDAQ:TTD) Don't Inspire Confidence
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Trade Desk (NASDAQ:TTD), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Trade Desk, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$219m ÷ (US$2.8b - US$1.3b) (Based on the trailing twelve months to June 2021).
Therefore, Trade Desk has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 10% it's much better.
Check out our latest analysis for Trade Desk
In the above chart we have measured Trade Desk's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Trade Desk.
What Can We Tell From Trade Desk's ROCE Trend?
On the surface, the trend of ROCE at Trade Desk doesn't inspire confidence. Around five years ago the returns on capital were 38%, but since then they've fallen to 15%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, Trade Desk has decreased its current liabilities to 48% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 48% is still pretty high, so those risks are still somewhat prevalent.
The Bottom Line On Trade Desk's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Trade Desk is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 2,524% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.
Like most companies, Trade Desk does come with some risks, and we've found 1 warning sign that you should be aware of.
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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What are the risks and opportunities for Trade Desk?
Trade Desk, Inc. operates as a technology company in the United States and internationally.
Rewards
Earnings are forecast to grow 41.88% per year
Risks
No risks detected for TTD from our risks checks.
Further research on
Trade Desk
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.
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About NasdaqGM:TTD
Trade Desk
Trade Desk, Inc. operates as a technology company in the United States and internationally.
Flawless balance sheet with high growth potential.
