There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. With that in mind, we've noticed some promising trends at TETRA Technologies (NYSE:TTI) so let's look a bit deeper.

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. The formula for this calculation on TETRA Technologies is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.12 = US$44m ÷ (US$491m - US$118m) (Based on the trailing twelve months to March 2024).

Therefore, TETRA Technologies has an ROCE of 12%. By itself that's a normal return on capital and it's in line with the industry's average returns of 12%.

In the above chart we have measured TETRA Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering TETRA Technologies for free.

How Are Returns Trending?

You'd find it hard not to be impressed with the ROCE trend at TETRA Technologies. We found that the returns on capital employed over the last five years have risen by 283%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, TETRA Technologies appears to been achieving more with less, since the business is using 70% less capital to run its operation. TETRA Technologies may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

What We Can Learn From TETRA Technologies' ROCE

In a nutshell, we're pleased to see that TETRA Technologies has been able to generate higher returns from less capital. Since the stock has returned a staggering 118% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 1 warning sign for TETRA Technologies you'll probably want to know about.

While TETRA Technologies 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.