Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of TPC Consolidated (ASX:TPC) looks great, so lets see what the trend can tell us.
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 TPC Consolidated, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = AU$4.1m ÷ (AU$32m - AU$14m) (Based on the trailing twelve months to June 2021).
So, TPC Consolidated has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Integrated Utilities industry average of 5.3%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for TPC Consolidated's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of TPC Consolidated, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
We're delighted to see that TPC Consolidated is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 23% on its capital. And unsurprisingly, like most companies trying to break into the black, TPC Consolidated is utilizing 646% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 45%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.
Our Take On TPC Consolidated's ROCE
Long story short, we're delighted to see that TPC Consolidated's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 497% to shareholders over the last five years, it looks like investors are recognizing 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 to note, we've identified 3 warning signs with TPC Consolidated and understanding these should be part of your investment process.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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