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There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Tennant (NYSE:TNC) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Tennant:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$134m ÷ (US$1.2b - US$274m) (Based on the trailing twelve months to September 2024).
So, Tennant has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Machinery industry average of 12%.
See our latest analysis for Tennant
Above you can see how the current ROCE for Tennant compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Tennant .
So How Is Tennant's ROCE Trending?
We like the trends that we're seeing from Tennant. The data shows that returns on capital have increased substantially over the last five years to 14%. The amount of capital employed has increased too, by 22%. So we're very much inspired by what we're seeing at Tennant thanks to its ability to profitably reinvest capital.
The Bottom Line
All in all, it's terrific to see that Tennant is reaping the rewards from prior investments and is growing its capital base. Since the stock has only returned 16% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
While Tennant looks impressive, no company is worth an infinite price. The intrinsic value infographic for TNC helps visualize whether it is currently trading for a fair price.
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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.