Yahoo Finance There's Been No Shortage Of Growth Recently For Transmetro's (ASX:TCO) Returns On Capital
There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Transmetro's (ASX:TCO) 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. Analysts use this formula to calculate it for Transmetro:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.086 = AU$3.1m ÷ (AU$43m - AU$6.6m) (Based on the trailing twelve months to June 2023).
Thus, Transmetro has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 6.5% generated by the Hospitality industry, it's much better.
See our latest analysis for Transmetro
Historical performance is a great place to start when researching a stock so above you can see the gauge for Transmetro's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Transmetro, check out these free graphs here.
What Does the ROCE Trend For Transmetro Tell Us?
Transmetro has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 96% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
What We Can Learn From Transmetro's ROCE
To bring it all together, Transmetro has done well to increase the returns it's generating from its capital employed. Since the stock has returned a solid 43% to shareholders over the last year, 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.
One more thing: We've identified 3 warning signs with Transmetro (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.
While Transmetro 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.
