Tornado Global Hydrovacs (CVE:TGH) Is Achieving High Returns On Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. And in light of that, the trends we're seeing at Tornado Global Hydrovacs' (CVE:TGH) look very promising so lets take a look.

What Is 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 Tornado Global Hydrovacs:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.38 = CA$12m ÷ (CA$52m - CA$20m) (Based on the trailing twelve months to March 2024).

Thus, Tornado Global Hydrovacs has an ROCE of 38%. In absolute terms that's a great return and it's even better than the Machinery industry average of 13%.

See our latest analysis for Tornado Global Hydrovacs

roce

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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Tornado Global Hydrovacs .

What Does the ROCE Trend For Tornado Global Hydrovacs Tell Us?

The fact that Tornado Global Hydrovacs is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 38% on its capital. Not only that, but the company is utilizing 78% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Key Takeaway

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. And a remarkable 389% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Tornado Global Hydrovacs does have some risks though, and we've spotted 1 warning sign for Tornado Global Hydrovacs that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com