Investors Could Be Concerned With Tristel's (LON:TSTL) Returns On Capital
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Tristel (LON:TSTL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Tristel is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = UK£5.3m ÷ (UK£41m - UK£5.8m) (Based on the trailing twelve months to June 2023).
Therefore, Tristel has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Medical Equipment industry average of 8.7% it's much better.
View our latest analysis for Tristel
Above you can see how the current ROCE for Tristel compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Tristel.
What Can We Tell From Tristel's ROCE Trend?
In terms of Tristel's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 22% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line On Tristel's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Tristel is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 70% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
On a separate note, we've found 2 warning signs for Tristel you'll probably want to know about.
While Tristel 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.
