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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Tile Shop Holdings (NASDAQ:TTSH) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Tile Shop Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.019 = US$4.5m ÷ (US$320m - US$78m) (Based on the trailing twelve months to December 2024).
So, Tile Shop Holdings has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 13%.
View our latest analysis for Tile Shop Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Tile Shop Holdings' ROCE against it's prior returns. If you're interested in investigating Tile Shop Holdings' past further, check out this free graph covering Tile Shop Holdings' past earnings, revenue and cash flow.
The Trend Of ROCE
Like most people, we're pleased that Tile Shop Holdings is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 27% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.
The Bottom Line On Tile Shop Holdings' ROCE
In a nutshell, we're pleased to see that Tile Shop Holdings has been able to generate higher returns from less capital. And a remarkable 992% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.