Yahoo Finance Why We Like The Returns At Tekcapital (LON:TEK)
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Tekcapital's (LON:TEK) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Tekcapital is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.37 = US$19m ÷ (US$52m - US$598k) (Based on the trailing twelve months to May 2021).
Therefore, Tekcapital has an ROCE of 37%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.
Check out our latest analysis for Tekcapital
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'd like to look at how Tekcapital has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Tekcapital's ROCE Trend?
We're delighted to see that Tekcapital is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 37% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Tekcapital is utilizing 1,520% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Key Takeaway
Overall, Tekcapital gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Astute investors may have an opportunity here because the stock has declined 12% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Tekcapital does have some risks, we noticed 4 warning signs (and 1 which can't be ignored) we think you should know about.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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