Returns On Capital At Tassal Group (ASX:TGR) Paint An Interesting Picture
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 Tassal Group (ASX:TGR), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Tassal Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.081 = AU$108m ÷ (AU$1.5b - AU$180m) (Based on the trailing twelve months to June 2020).
Thus, Tassal Group has an ROCE of 8.1%. In absolute terms, that's a low return, but it's much better than the Food industry average of 5.4%.
Check out our latest analysis for Tassal Group
In the above chart we have measured Tassal Group's 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 Tassal Group.
So How Is Tassal Group's ROCE Trending?
The trend of ROCE doesn't look fantastic because it's fallen from 14% five years ago, while the business's capital employed increased by 151%. Usually this isn't ideal, but given Tassal Group conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Tassal Group might not have received a full period of earnings contribution from it.
The Bottom Line
In summary, Tassal Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 7.6% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you'd like to know about the risks facing Tassal Group, we've discovered 1 warning sign that you should be aware of.
While Tassal Group 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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