Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we take a look at a few key financial metrics. A common approach is to try to find a business with Return on capital employed (ROCE) which is increasing, in parallel with a amount capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. Although when we looked Train Alliance Sweden (STO: TRAIN B), it didn’t seem to tick all of those boxes.
What is Return on Capital Employed (ROCE)?
If you’ve never worked with ROCE before, it measures the “ return ” (profit before tax) that a business generates from the capital employed in its business. The formula for this calculation on Train Alliance Sweden is:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.017 = kr26m ÷ (kr1.5b – kr29m) (Based on the last twelve months up to March 2021).
So, Train Alliance Sweden has a ROCE of 1.7%. In the end, that’s a low return and underperforming the construction industry average by 14%.
Check out our latest analysis for Train Alliance Sweden
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 would like to dig deeper into your investigation into Train Alliance Sweden’s past, check out this free graph of past income, income and cash flow.
What does the ROCE trend tell us for Train Alliance Sweden?
On the surface, the ROCE trend at Train Alliance Sweden does not inspire confidence. About five years ago the return on capital was 2.9%, but since then it has fallen to 1.7%. On the other hand, the company has employed more capital with no corresponding improvement in sales over the past year, which might suggest that these investments are longer-term games. It may take some time before the company begins to see a change in the benefits of these investments.
Putting all of this together, while we are somewhat encouraged by Train Alliance Sweden’s reinvestment in its own business, we are aware that the returns are diminishing. Given that the stock has gained 93% over the past year, investors must think there are better things to come. Ultimately, if the underlying trends persist, we wouldn’t hold our breath that this is a multi-bagger in the future.
One more thing: we have identified 4 warning signs with Train Alliance Sweden (at least 3 that are of concern), and understanding them would certainly be helpful.
If you want to look for strong businesses with significant income, check out this free list of companies with good balance sheets and impressive returns on equity.
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