What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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 Terex’s (NYSE:TEX) returns on capital, so let’s have a look.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Terex is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.24 = US$641m ÷ (US$3.8b – US$1.1b) (Based on the trailing twelve months to March 2024).
So, Terex has an ROCE of 24%. In absolute terms that’s a great return and it’s even better than the Machinery industry average of 13%.
Check out our latest analysis for Terex
Above you can see how the current ROCE for Terex compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free analyst report for Terex .
What Can We Tell From Terex’s ROCE Trend?
Terex is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 67% over the last five years. So it’s likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn’t changed considerably. The company is doing well in that sense, and it’s worth investigating what the management team has planned for long term growth prospects.
The Bottom Line On Terex’s ROCE
In summary, we’re delighted to see that Terex has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 81% to shareholders over the last five years, it’s fair to say investors are beginning to recognize these changes. 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.
On a final note, we found 2 warning signs for Terex (1 is concerning) 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.
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