TT Electronics' (LON:TTG) Returns On Capital Not Reflecting Well On The Business
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Having said that, from a first glance at TT Electronics (LON:TTG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for TT Electronics:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = UK£11m ÷ (UK£688m - UK£179m) (Based on the trailing twelve months to June 2023).
So, TT Electronics has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 13%.
Check out our latest analysis for TT Electronics
In the above chart we have measured TT Electronics' 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 TT Electronics.
So How Is TT Electronics' ROCE Trending?
On the surface, the trend of ROCE at TT Electronics doesn't inspire confidence. Around five years ago the returns on capital were 5.7%, but since then they've fallen to 2.1%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Key Takeaway
While returns have fallen for TT Electronics in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 26% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
TT Electronics does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...
While TT Electronics 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.
