TSR (NASDAQ:TSRI) Is Experiencing Growth In Returns On Capital
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. With that in mind, we've noticed some promising trends at TSR (NASDAQ:TSRI) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for TSR, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$2.7m ÷ (US$24m - US$6.6m) (Based on the trailing twelve months to August 2023).
Therefore, TSR has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 12% it's much better.
View our latest analysis for TSR
Historical performance is a great place to start when researching a stock so above you can see the gauge for TSR's ROCE against it's prior returns. If you're interested in investigating TSR's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From TSR's ROCE Trend?
We like the trends that we're seeing from TSR. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 107% more capital is being employed now too. So we're very much inspired by what we're seeing at TSR thanks to its ability to profitably reinvest capital.
On a related note, the company's ratio of current liabilities to total assets has decreased to 28%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
Our Take On TSR's ROCE
To sum it up, TSR has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 92% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if TSR can keep these trends up, it could have a bright future ahead.
On a separate note, we've found 1 warning sign for TSR you'll probably want to know about.
While TSR isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
