Will The ROCE Trend At Tandem Group (LON:TND) Continue?
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Tandem Group (LON:TND) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Tandem Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = UK£2.9m ÷ (UK£26m - UK£8.7m) (Based on the trailing twelve months to December 2019).
So, Tandem Group has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Leisure industry average of 14%.
See our latest analysis for Tandem Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Tandem Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Tandem Group, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
The trends we've noticed at Tandem Group are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 16%. The amount of capital employed has increased too, by 42%. So we're very much inspired by what we're seeing at Tandem Group thanks to its ability to profitably reinvest capital.
One more thing to note, Tandem Group has decreased current liabilities to 33% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Tandem Group has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
What We Can Learn From Tandem Group's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Tandem Group has. And with the stock having performed exceptionally well over the last five years, these trends are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
One more thing, we've spotted 2 warning signs facing Tandem Group that you might find interesting.
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.
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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