Yahoo Finance Returns On Capital At TJX Companies (NYSE:TJX) Paint A Concerning Picture
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at TJX Companies (NYSE:TJX) and its ROCE trend, we weren't exactly thrilled.
What is 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 TJX Companies:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$2.2b ÷ (US$30b - US$9.9b) (Based on the trailing twelve months to May 2021).
Therefore, TJX Companies has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Specialty Retail industry average it falls behind.
View our latest analysis for TJX Companies
In the above chart we have measured TJX Companies' 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 TJX Companies.
So How Is TJX Companies' ROCE Trending?
In terms of TJX Companies' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 51% five years ago. However it looks like TJX Companies might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Key Takeaway
In summary, TJX Companies is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 83% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
Like most companies, TJX Companies does come with some risks, and we've found 3 warning signs that you should be aware of.
While TJX Companies 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.
This article by Simply Wall St is general in nature. 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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