Returns On Capital At Twin Disc (NASDAQ:TWIN) Have Stalled
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Twin Disc (NASDAQ:TWIN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for Twin Disc, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.057 = US$11m ÷ (US$286m - US$89m) (Based on the trailing twelve months to March 2023).
Thus, Twin Disc has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Machinery industry average of 11%.
Check out our latest analysis for Twin Disc
Historical performance is a great place to start when researching a stock so above you can see the gauge for Twin Disc's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Twin Disc, check out these free graphs here.
The Trend Of ROCE
Things have been pretty stable at Twin Disc, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Twin Disc to be a multi-bagger going forward.
The Key Takeaway
In a nutshell, Twin Disc has been trudging along with the same returns from the same amount of capital over the last five years. And investors appear hesitant that the trends will pick up because the stock has fallen 56% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
One more thing, we've spotted 1 warning sign facing Twin Disc 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.
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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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