To find multi-bagger stock, what are the underlying trends we need to look for in a business? In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. This shows us that it is a composing machine, capable of continually reinvesting its profits in the business and generating higher returns. With that in mind, we’ve noticed some promising trends at Tetra Tech (NASDAQ: TTEK) So let’s look a little deeper.
What is Return on Employee Capital (ROCE)?
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. The formula for this calculation on Tetra Tech is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.16 = $ 261 million ÷ ($ 2.5 billion – $ 797 million) (Based on the last twelve months up to March 2021).
Therefore, Tetra Tech has a ROCE of 16%. On its own, that’s a standard return, but it’s far better than the 7.4% generated by the commercial services industry.
Check out our latest review for Tetra Tech
Above you can see how Tetra Tech’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you want, you can check out the analysts’ forecasts covering Tetra Tech here for free.
What does the ROCE trend tell us for Tetra Tech?
Tetra Tech is showing positive trends. Figures show that over the past five years, returns on capital employed have increased dramatically to 16%. The company actually makes more money per dollar of capital used, and it should be noted that the amount of capital has also increased by 30%. So we’re very inspired by what we see at Tetra Tech through its ability to reinvest capital profitably.
What we can learn from Tetra Tech’s ROCE
To sum up, Tetra Tech has proven that it can reinvest in the business and generate higher returns on that capital employed, which is great. And with the stock having performed exceptionally well over the past five years, these trends are being taken into account by investors. In light of this, we think it’s worth taking this title further because if Tetra Tech can maintain these trends, it could have a bright future.
Like most businesses, Tetra Tech comes with certain risks, and we have found 1 warning sign that you need to be aware of.
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