What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in TETRA Technologies' (NYSE:TTI) returns on capital, so let's have a look.
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. The formula for this calculation on TETRA Technologies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$44m ÷ (US$500m - US$120m) (Based on the trailing twelve months to June 2024).
Therefore, TETRA Technologies has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Energy Services industry average of 11%.
Above you can see how the current ROCE for TETRA Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for TETRA Technologies .
So How Is TETRA Technologies' ROCE Trending?
You'd find it hard not to be impressed with the ROCE trend at TETRA Technologies. We found that the returns on capital employed over the last five years have risen by 270%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 69% less capital than it was five years ago. TETRA Technologies may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Bottom Line
In summary, it's great to see that TETRA Technologies has been able to turn things around and earn higher returns on lower amounts of capital. And with a respectable 86% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
TETRA Technologies does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.
While TETRA Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
