If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in TOYO's (NASDAQ:TOYO) returns on capital, so let's have a look.
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 TOYO is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$12m ÷ (US$238m - US$169m) (Based on the trailing twelve months to December 2023).
So, TOYO has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 9.3% it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for TOYO's ROCE against it's prior returns. If you'd like to look at how TOYO has performed in the past in other metrics, you can view this free graph of TOYO's past earnings, revenue and cash flow.
The Trend Of ROCE
The fact that TOYO is now generating some pre-tax profits from its prior investments is very encouraging. About one year ago the company was generating losses but things have turned around because it's now earning 17% on its capital. Not only that, but the company is utilizing 759% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 71% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
Our Take On TOYO's ROCE
To the delight of most shareholders, TOYO has now broken into profitability. Given the stock has declined 63% in the last year, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
TOYO does come with some risks though, we found 5 warning signs in our investment analysis, and 4 of those are significant...
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
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