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What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Thermon Group Holdings (NYSE:THR), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Thermon Group Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.065 = US$36m ÷ (US$637m - US$81m) (Based on the trailing twelve months to March 2022).
So, Thermon Group Holdings has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 9.2%.
View our latest analysis for Thermon Group Holdings
In the above chart we have measured Thermon Group Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
The returns on capital haven't changed much for Thermon Group Holdings in recent years. Over the past five years, ROCE has remained relatively flat at around 6.5% and the business has deployed 38% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
What We Can Learn From Thermon Group Holdings' ROCE
In summary, Thermon Group Holdings has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has declined 23% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
Thermon Group Holdings could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
While Thermon Group Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.