If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Toro (NYSE:TTC), they do have a high ROCE, but we weren't exactly elated from how returns are trending.
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. Analysts use this formula to calculate it for Toro:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = US$503m ÷ (US$3.4b - US$1.0b) (Based on the trailing twelve months to July 2022).
So, Toro has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.
Above you can see how the current ROCE for Toro 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.
What Can We Tell From Toro's ROCE Trend?
The trend of ROCE doesn't look fantastic because it's fallen from 34% five years ago, while the business's capital employed increased by 137%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Toro might not have received a full period of earnings contribution from it. Additionally, we found that Toro's most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.
Our Take On Toro's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Toro. And the stock has followed suit returning a meaningful 47% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
Toro does have some risks though, and we've spotted 2 warning signs for Toro that you might be interested in.
Toro is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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