Investors Will Want Trakm8 Holdings' (LON:TRAK) Growth In ROCE To Persist
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Speaking of which, we noticed some great changes in Trakm8 Holdings' (LON:TRAK) returns on capital, so let's have a 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. Analysts use this formula to calculate it for Trakm8 Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = UK£2.3m ÷ (UK£37m - UK£15m) (Based on the trailing twelve months to September 2023).
So, Trakm8 Holdings has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 11% generated by the Communications industry.
See our latest analysis for Trakm8 Holdings
Above you can see how the current ROCE for Trakm8 Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Trakm8 Holdings here for free.
What Can We Tell From Trakm8 Holdings' ROCE Trend?
Trakm8 Holdings has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 10% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Trakm8 Holdings has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 40% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
What We Can Learn From Trakm8 Holdings' ROCE
To sum it up, Trakm8 Holdings is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 45% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
Trakm8 Holdings does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
