Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 Tigo Energy (NASDAQ:TYGO) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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 Tigo Energy, this is the formula:

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

0.16 = US$21m ÷ (US$195m - US$67m) (Based on the trailing twelve months to June 2023).

So, Tigo Energy has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 13% generated by the Electrical industry.

See our latest analysis for Tigo Energy

In the above chart we have measured Tigo Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Tigo Energy.

What Can We Tell From Tigo Energy's ROCE Trend?

We're delighted to see that Tigo Energy is reaping rewards from its investments and is now generating some pre-tax profits. About one year ago the company was generating losses but things have turned around because it's now earning 16% on its capital. And unsurprisingly, like most companies trying to break into the black, Tigo Energy is utilizing 317% more capital than it was one year ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 34%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

To the delight of most shareholders, Tigo Energy has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 33% in the last year. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we've found 2 warning signs for Tigo Energy that we think you should be aware of.

While Tigo Energy may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.