Yahoo Finance Some Investors May Be Worried About Taiga Building Products' (TSE:TBL) Returns On Capital
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after investigating Taiga Building Products (TSE:TBL), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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. Analysts use this formula to calculate it for Taiga Building Products:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = CA$84m ÷ (CA$668m - CA$154m) (Based on the trailing twelve months to September 2023).
So, Taiga Building Products has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 15% generated by the Trade Distributors industry.
View our latest analysis for Taiga Building Products
Historical performance is a great place to start when researching a stock so above you can see the gauge for Taiga Building Products' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Taiga Building Products, check out these free graphs here.
So How Is Taiga Building Products' ROCE Trending?
When we looked at the ROCE trend at Taiga Building Products, we didn't gain much confidence. To be more specific, ROCE has fallen from 23% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a side note, Taiga Building Products has done well to pay down its current liabilities to 23% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
What We Can Learn From Taiga Building Products' ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Taiga Building Products have fallen, meanwhile the business is employing more capital than it was five years ago. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 204%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
If you're still interested in Taiga Building Products it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
While Taiga Building Products 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.
