tinyBuild (LON:TBLD) Is Looking To Continue Growing Its Returns On Capital
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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at tinyBuild (LON:TBLD) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for tinyBuild, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$18m ÷ (US$134m - US$20m) (Based on the trailing twelve months to December 2022).
Therefore, tinyBuild has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Entertainment industry average of 13%.
View our latest analysis for tinyBuild
Above you can see how the current ROCE for tinyBuild compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is tinyBuild's ROCE Trending?
Investors would be pleased with what's happening at tinyBuild. Over the last five years, returns on capital employed have risen substantially to 16%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 1,857%. So we're very much inspired by what we're seeing at tinyBuild thanks to its ability to profitably reinvest capital.
One more thing to note, tinyBuild has decreased current liabilities to 15% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
In Conclusion...
All in all, it's terrific to see that tinyBuild is reaping the rewards from prior investments and is growing its capital base. Although the company may be facing some issues elsewhere since the stock has plunged 74% in the last year. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
One more thing: We've identified 2 warning signs with tinyBuild (at least 1 which is significant) , and understanding them would certainly be useful.
While tinyBuild may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
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