If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of TJX Companies (NYSE:TJX) looks attractive right now, so lets see what the trend of returns can tell us.
What Is Return On Capital Employed (ROCE)?
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 TJX Companies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.31 = US$6.1b ÷ (US$31b - US$11b) (Based on the trailing twelve months to August 2024).
Therefore, TJX Companies has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.
In the above chart we have measured TJX Companies' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for TJX Companies .
What Does the ROCE Trend For TJX Companies Tell Us?
We'd be pretty happy with returns on capital like TJX Companies. The company has employed 23% more capital in the last five years, and the returns on that capital have remained stable at 31%. Now considering ROCE is an attractive 31%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If TJX Companies can keep this up, we'd be very optimistic about its future.
The Bottom Line
In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And long term investors would be thrilled with the 106% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
If you'd like to know about the risks facing TJX Companies, we've discovered 1 warning sign that you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.
