Investors should be encouraged by Tekcapital’s capital returns (LON: TEK)

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What are the first trends to look for to identify a security that could increase in value over the long term? Among other things, we’ll want to see two things; first, a growth return on capital employed (ROCE) and on the other hand, an expansion of the company amount capital employed. Basically, it means that a business has profitable initiatives that it can keep reinvesting in, which is a hallmark of a dialing machine. Speaking of which, we have noticed some big changes in Tekcapital (LON: TEK) returns to the capital, so let’s take a look.

Understanding Return on Capital Employed (ROCE)

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for Tekcapital:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.23 = US $ 7.7M ÷ (US $ 33M – US $ 403K) (Based on the last twelve months up to November 2020).

Therefore, Tekcapital has a ROCE of 23%. This is a fantastic return and not only that, it exceeds the 13% average earned by companies in a similar industry.

Discover our latest analysis for Tekcapital

roce

While the past is not representative of the future, it can be helpful to know how a business has behaved historically, which is why we have this graph above. If you want to delve into Tekcapital’s earnings, income and cash flow history, check out these free graphics here.

What does the ROCE trend tell us for Tekcapital?

The fact that Tekcapital is now generating pre-tax profits on its previous investments is very encouraging. The company generated losses five years ago, but is now gaining 23%, which is a sight for sore eyes. On top of that, Tekcapital employs 782% more capital than before, which is expected of a company trying to break into profitability. This may indicate that there are many opportunities to invest capital in-house and at ever higher rates, two common traits of a multi-bagger.

In conclusion…

All in all, Tekcapital gets a big tick from us thanks in large part to the fact that it is now profitable and is reinvesting in its business. Savvy investors may have an opportunity here because the stock has fallen 66% over the past five years. It therefore seems justified to continue researching this company and determine whether these trends will continue or not.

Tekcapital does carry certain risks, however, we have observed 4 warning signs in our investment analysis, and 2 of them are important …

High returns are a key ingredient to strong performance, so check out our free list of stocks that generate high returns on equity with strong balance sheets.

This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in the mentioned stocks.

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