Yahoo Finance Tree Island Steel (TSE:TSL) Is Investing Its Capital With Increasing Efficiency
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Tree Island Steel's (TSE:TSL) look very promising so lets take a look.
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. The formula for this calculation on Tree Island Steel is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.39 = CA$65m ÷ (CA$196m - CA$28m) (Based on the trailing twelve months to June 2022).
Therefore, Tree Island Steel has an ROCE of 39%. That's a fantastic return and not only that, it outpaces the average of 3.5% earned by companies in a similar industry.
View our latest analysis for Tree Island Steel
Historical performance is a great place to start when researching a stock so above you can see the gauge for Tree Island Steel's ROCE against it's prior returns. If you're interested in investigating Tree Island Steel's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Tree Island Steel's ROCE Trend?
Investors would be pleased with what's happening at Tree Island Steel. Over the last five years, returns on capital employed have risen substantially to 39%. Basically the business is earning more per dollar of capital invested and in addition to that, 93% more capital is being employed now too. So we're very much inspired by what we're seeing at Tree Island Steel thanks to its ability to profitably reinvest capital.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 14%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
The Bottom Line On Tree Island Steel's ROCE
In summary, it's great to see that Tree Island Steel can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a solid 83% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Tree Island Steel (of which 1 shouldn't be ignored!) that you should know about.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.
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