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Terex (NYSE:TEX) Shareholders Will Want The ROCE Trajectory To Continue

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There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So on that note, Terex (NYSE:TEX) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Terex, this is the formula:

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

0.12 = US$258m ÷ (US$3.1b - US$945m) (Based on the trailing twelve months to June 2021).

Thus, Terex has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 9.6% it's much better.

View our latest analysis for Terex

roce
roce

Above you can see how the current ROCE for Terex 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 Terex here for free.

What Can We Tell From Terex's ROCE Trend?

You'd find it hard not to be impressed with the ROCE trend at Terex. We found that the returns on capital employed over the last five years have risen by 83%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 48% less capital than it was five years ago. Terex may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Bottom Line On Terex's ROCE

In summary, it's great to see that Terex 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 patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know about the risks facing Terex, we've discovered 2 warning signs that you should be aware of.

While Terex 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.