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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Tervita (TSE:TEV) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Tervita is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.044 = CA$63m ÷ (CA$1.6b - CA$136m) (Based on the trailing twelve months to September 2020).
Therefore, Tervita has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 7.5%.
Above you can see how the current ROCE for Tervita 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 Tervita.
What Can We Tell From Tervita's ROCE Trend?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 910% over the last four years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
Our Take On Tervita's ROCE
To bring it all together, Tervita has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 57% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you want to continue researching Tervita, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Tervita 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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