To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 on that note, TXCOM Société Anonyme (EPA:ALTXC) looks quite promising in regards to its trends of return on capital.
What is Return On Capital Employed (ROCE)?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for TXCOM Société Anonyme, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.15 = €1.5m ÷ (€14m – €3.7m) (Based on the trailing twelve months to June 2020).
So, TXCOM Société Anonyme has an ROCE of 15%. In absolute terms, that’s a satisfactory return, but compared to the Communications industry average of 7.3% it’s much better.
Above you can see how the current ROCE for TXCOM Société Anonyme 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 TXCOM Société Anonyme here for free.
So How Is TXCOM Société Anonyme’s ROCE Trending?
TXCOM Société Anonyme is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 112% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company’s efficiencies. It’s worth looking deeper into this though because while it’s great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 26% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
In summary, we’re delighted to see that TXCOM Société Anonyme has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 54% awarded to those who held the stock over the last three years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a final note, we’ve found 3 warning signs for TXCOM Société Anonyme that we think you should be aware of.
While TXCOM Société Anonyme 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. 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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