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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Turbon (FRA:TUR) looks quite promising in regards to its trends of return on capital.
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 Turbon, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = €2.1m ÷ (€46m - €11m) (Based on the trailing twelve months to December 2023).
So, Turbon has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 11%.
Check out our latest analysis for Turbon
Historical performance is a great place to start when researching a stock so above you can see the gauge for Turbon's ROCE against it's prior returns. If you'd like to look at how Turbon has performed in the past in other metrics, you can view this free graph of Turbon's past earnings, revenue and cash flow.
What Does the ROCE Trend For Turbon Tell Us?
The fact that Turbon is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 6.1% on its capital. Not only that, but the company is utilizing 23% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 23%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Turbon has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Bottom Line On Turbon's ROCE
To the delight of most shareholders, Turbon has now broken into profitability. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 22% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.