Returns On Capital At Turning Point Brands (NYSE:TPB) Paint An Interesting Picture
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Turning Point Brands' (NYSE:TPB) ROCE trend, we were pretty happy with what we saw.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for Turning Point Brands, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$69m ÷ (US$479m - US$55m) (Based on the trailing twelve months to September 2020).
Thus, Turning Point Brands has an ROCE of 16%. That's a pretty standard return and it's in line with the industry average of 16%.
View our latest analysis for Turning Point Brands
Above you can see how the current ROCE for Turning Point Brands 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 Turning Point Brands.
How Are Returns Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 83% more capital in the last five years, and the returns on that capital have remained stable at 16%. 16% is a pretty standard return, and it provides some comfort knowing that Turning Point Brands has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
Our Take On Turning Point Brands' ROCE
In the end, Turning Point Brands has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 112% return they've received over the last three years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
Turning Point Brands does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...
While Turning Point Brands 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.
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