To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company withreturnson capital employed (ROCE) that are increasing, in conjunction with a growingamountof capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at TJX Companies (NYSE:TJX) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for TJX Companies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) รท (Total Assets - Current Liabilities)
0.058 = US$1.1b รท (US$27b - US$7.6b)(Based on the trailing twelve months to August 2020).
Therefore, TJX Companies has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 9.6%.
View our latest analysis for TJX Companies
Above you can see how the current ROCE for TJX Companies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering TJX Companiesherefor free.
So How Is TJX Companies' ROCE Trending?
On the surface, the trend of ROCE at TJX Companies doesn't inspire confidence. Around five years ago the returns on capital were 51%, but since then they've fallen to 5.8%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
The Bottom Line On TJX Companies' ROCE
In summary, we're somewhat concerned by TJX Companies' diminishing returns on increasing amounts of capital. However the stock has delivered a 67% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel to comfortable with the fundamentals so we'd be steering clear of this stock for now.
One more thing to note, we've identified 3 warning signs with TJX Companiesand understanding these should be part of your investment process.
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.
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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