To find a multi-bagger stock, what are the underlying trends to look for in a business? First of all, we want to see a return on capital employed (ROCE) which increases, and on the other hand, a based capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So when we ran our eyes TCM Group (CPH: TCM) trend of the ROCE, we really liked what we saw.
Understanding Return on Capital Employed (ROCE)
If you’ve never worked with ROCE before, it measures the “ return ” (profit before tax) that a business generates from the capital employed in its business. To calculate this metric for TCM Group, here is the formula:
Return on capital employed = Earnings before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.20 = 1.43 m kr Ã· (945 kr – 240 m kr) (Based on the last twelve months up to March 2021).
Therefore, TCM Group has a ROCE of 20%. This is a fantastic return and not only that, it exceeds the 11% average earned by companies in a similar industry.
Discover our latest analysis for TCM Group
Above you can see how TCM Group’s current ROCE compares to its past returns on capital, but you can’t say more about the past. If you want, you can view the analysts’ forecasts covering TCM Group here for free.
What can we say about TCM Group’s ROCE trend?
We would be rather satisfied with returns on capital like TCM Group. Over the past five years, ROCE has remained relatively stable at around 20% and the company has deployed 101% additional capital in its operations. With such high returns, it’s great that the company can continually reinvest their money at such attractive rates of return. If TCM Group can continue this way, we would be very optimistic about its future.
The key to take away
In the end, the company has proven that it can reinvest its capital at high rates of return, which you will recall is a trait of a multi-bagger. So it’s no surprise that shareholders got a respectable 89% return if they owned in the past three years. So while investors seem to recognize these promising trends, we still believe the stock deserves further research.
Like most companies, TCM Group carries certain risks, and we have found 1 warning sign that you need to be aware of.
If you’d like to see other companies driving high returns, check out our free List of high yielding companies with strong balance sheets here.
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