Yahoo Finance What Do The Returns On Capital At Tracsis (LON:TRCS) Tell Us?
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. In light of that, when we looked at Tracsis (LON:TRCS) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What is it?
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 Tracsis, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.068 = UK£4.6m ÷ (UK£85m - UK£17m) (Based on the trailing twelve months to July 2020).
Therefore, Tracsis has an ROCE of 6.8%. Even though it's in line with the industry average of 7.4%, it's still a low return by itself.
Check out our latest analysis for Tracsis
Above you can see how the current ROCE for Tracsis compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Tracsis.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Tracsis doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.8% from 17% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by Tracsis' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 30% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One more thing, we've spotted 2 warning signs facing Tracsis that you might find interesting.
While Tracsis may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
This article by Simply Wall St is general in nature. 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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