If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Tandem Group’s (LON:TND) trend of ROCE, we liked what we saw.
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. To calculate this metric for Tandem Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = UK£3.4m ÷ (UK£35m – UK£6.1m) (Based on the trailing twelve months to June 2022).
So, Tandem Group has an ROCE of 12%. In absolute terms, that’s a pretty standard return but compared to the Leisure industry average it falls behind.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Tandem Group’s ROCE against it’s prior returns. If you’re interested in investigating Tandem Group’s past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
The trend of ROCE doesn’t stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 100% more capital into its operations. 12% is a pretty standard return, and it provides some comfort knowing that Tandem Group has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
On a side note, Tandem Group has done well to reduce current liabilities to 18% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
The Bottom Line
In the end, Tandem Group has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 219% return they’ve received over the last five years. So even though the stock might be more “expensive” than it was before, we think the strong fundamentals warrant this stock for further research.
Tandem Group does have some risks, we noticed 4 warning signs (and 1 which can’t be ignored) we think you should know about.
While Tandem Group isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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