Yahoo Finance Tornado Global Hydrovacs' (CVE:TGH) Returns On Capital Are Heading Higher
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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Tornado Global Hydrovacs (CVE:TGH) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Tornado Global Hydrovacs, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = CA$4.4m ÷ (CA$47m - CA$23m) (Based on the trailing twelve months to September 2023).
Therefore, Tornado Global Hydrovacs has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 8.3% generated by the Machinery industry.
Check out our latest analysis for Tornado Global Hydrovacs
In the above chart we have measured Tornado Global Hydrovacs' 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 Can We Tell From Tornado Global Hydrovacs' ROCE Trend?
We're delighted to see that Tornado Global Hydrovacs is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 18% on its capital. Not only that, but the company is utilizing 36% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 49% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
What We Can Learn From Tornado Global Hydrovacs' ROCE
In summary, it's great to see that Tornado Global Hydrovacs has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 271% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
Tornado Global Hydrovacs does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.
While Tornado Global Hydrovacs isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
