Under The Bonnet, Toromont Industries' (TSE:TIH) Returns Look Impressive
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'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. So when we looked at the ROCE trend of Toromont Industries (TSE:TIH) we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
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 Toromont Industries, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = CA$688m ÷ (CA$4.2b - CA$918m) (Based on the trailing twelve months to June 2023).
Therefore, Toromont Industries has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.
View our latest analysis for Toromont Industries
Above you can see how the current ROCE for Toromont Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Toromont Industries here for free.
What Can We Tell From Toromont Industries' ROCE Trend?
Toromont Industries is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 21%. The amount of capital employed has increased too, by 57%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a related note, the company's ratio of current liabilities to total assets has decreased to 22%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
The Bottom Line
To sum it up, Toromont Industries 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 80% return over the last five years. In light of that, we think it's worth looking further into this stock because if Toromont Industries can keep these trends up, it could have a bright future ahead.
If you want to continue researching Toromont Industries, you might be interested to know about the 1 warning sign that our analysis has discovered.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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.
