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Here's What To Make Of TravelCenters of America's (NASDAQ:TA) Decelerating Rates Of Return

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  • TA

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think TravelCenters of America (NASDAQ:TA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for TravelCenters of America:

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

0.023 = US$69m ÷ (US$3.5b - US$504m) (Based on the trailing twelve months to March 2021).

Therefore, TravelCenters of America has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 15%.

Check out our latest analysis for TravelCenters of America

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Above you can see how the current ROCE for TravelCenters of America 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 report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for TravelCenters of America in recent years. The company has employed 129% more capital in the last five years, and the returns on that capital have remained stable at 2.3%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Key Takeaway

In conclusion, TravelCenters of America has been investing more capital into the business, but returns on that capital haven't increased. And in the last five years, the stock has given away 26% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to know some of the risks facing TravelCenters of America we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.

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.

This article by Simply Wall St is general in nature. 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 (at) simplywallst.com.