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Is There More Growth In Store For Turtle Beach's (NASDAQ:HEAR) Returns On Capital?

Simply Wall St
·3 min read

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Turtle Beach's (NASDAQ:HEAR) returns on capital, so let's have 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 Turtle Beach:

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

0.10 = US$6.6m ÷ (US$96m - US$33m) (Based on the trailing twelve months to March 2020).

Therefore, Turtle Beach has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Durables industry average of 11%.

Check out our latest analysis for Turtle Beach

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In the above chart we have a measured Turtle Beach's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Turtle Beach here for free.

How Are Returns Trending?

Like most people, we're pleased that Turtle Beach is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 10% which is no doubt a relief for some early shareholders. In regards to capital employed, Turtle Beach is using 57% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

The Key Takeaway

In summary, it's great to see that Turtle Beach has been able to turn things around and earn higher returns on lower amounts of capital. And with the stock having performed exceptionally well over the last five years, these trends are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Turtle Beach, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Turtle Beach isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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@simplywallst.com.