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There are a few key trends to look for if we want to identify the next multi-bagger. 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. Having said that, from a first glance at Taiga Building Products (TSE:TBL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Taiga Building Products is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = CA$64m ÷ (CA$681m - CA$144m) (Based on the trailing twelve months to September 2024).
Therefore, Taiga Building Products has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Trade Distributors industry.
View our latest analysis for Taiga Building Products
Historical performance is a great place to start when researching a stock so above you can see the gauge for Taiga Building Products' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Taiga Building Products.
What Does the ROCE Trend For Taiga Building Products Tell Us?
When we looked at the ROCE trend at Taiga Building Products, we didn't gain much confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 12%. However it looks like Taiga Building Products might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
On a side note, Taiga Building Products has done well to pay down its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.