Traton (ETR:8TRA) Is Doing The Right Things To Multiply Its Share Price
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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Traton (ETR:8TRA) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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 Traton, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.094 = €3.4b ÷ (€60b - €23b) (Based on the trailing twelve months to June 2023).
Therefore, Traton has an ROCE of 9.4%. In absolute terms, that's a low return but it's around the Machinery industry average of 11%.
Check out our latest analysis for Traton
In the above chart we have measured Traton's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Traton.
What The Trend Of ROCE Can Tell Us
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 9.4%. Basically the business is earning more per dollar of capital invested and in addition to that, 32% more capital is being employed now too. So we're very much inspired by what we're seeing at Traton thanks to its ability to profitably reinvest capital.
Our Take On Traton's ROCE
To sum it up, Traton has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 28% return over the last three years. Therefore, we think it would be worth your time to check if these trends are going to continue.
Traton does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.
While Traton 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.
