There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of TClarke (LON:CTO) looks decent, right now, so lets see what the trend of returns can tell us.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for TClarke, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = UK£8.4m ÷ (UK£169m - UK£116m) (Based on the trailing twelve months to December 2021).
So, TClarke has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Construction industry.
In the above chart we have measured TClarke's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering TClarke here for free.
So How Is TClarke's ROCE Trending?
While the current returns on capital are decent, they haven't changed much. The company has consistently earned 16% for the last five years, and the capital employed within the business has risen 42% in that time. 16% is a pretty standard return, and it provides some comfort knowing that TClarke has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
On a separate but related note, it's important to know that TClarke has a current liabilities to total assets ratio of 68%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line
In the end, TClarke has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 103% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
One final note, you should learn about the 5 warning signs we've spotted with TClarke (including 2 which are significant) .
While TClarke 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.