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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? 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. Speaking of which, we noticed some great changes in Tonkens Agrar's (ETR:GTK) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Tonkens Agrar, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = €2.0m ÷ (€38m - €2.5m) (Based on the trailing twelve months to December 2023).
So, Tonkens Agrar has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Food industry average of 11%.
See our latest analysis for Tonkens Agrar
Historical performance is a great place to start when researching a stock so above you can see the gauge for Tonkens Agrar's ROCE against it's prior returns. If you'd like to look at how Tonkens Agrar has performed in the past in other metrics, you can view this free graph of Tonkens Agrar's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Tonkens Agrar has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 5.6%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
The Bottom Line On Tonkens Agrar's ROCE
In summary, we're delighted to see that Tonkens Agrar has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 51% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.