There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Tornos Holding (VTX:TOHN) and its trend of ROCE, we really liked what we saw.
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 Tornos Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = CHF18m ÷ (CHF154m - CHF45m) (Based on the trailing twelve months to June 2022).
Thus, Tornos Holding has an ROCE of 17%. That's a relatively normal return on capital, and it's around the 16% generated by the Machinery industry.
See our latest analysis for Tornos Holding
Above you can see how the current ROCE for Tornos Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Tornos Holding.
How Are Returns Trending?
Investors would be pleased with what's happening at Tornos Holding. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 27%. So we're very much inspired by what we're seeing at Tornos Holding thanks to its ability to profitably reinvest capital.
The Bottom Line
To sum it up, Tornos Holding has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 5.1% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Tornos Holding (of which 1 is concerning!) that you should know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.