We are pleased with these underlying trends in returns on capital at Trakm8 Holdings (LON:TRAK)

If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends to look out for. A common approach is to try to find a company that has gives back on the capital employed (ROCE) which are increasing, in conjunction with a growing quantity of the invested capital. This shows us that it is a compounding machine, which can continuously reinvest its profits back into the business and generate higher returns. So in that respect, Trakm8 holdings (LON:TRAK) looks promising in terms of return on capital trends.

What is Return on Invested Capital (ROCE)?

For those who aren’t sure what ROCE is, it measures the amount of pre-tax profit a company can generate from the capital invested in its business. Analysts use this formula to calculate it for Trakm8 Holdings:

Return on invested capital = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

0.10 = UK£2.3 million ÷ (UK£37 million – UK£15 million) (Based on the past twelve months to September 2023).

So, Trakm8 Holdings has a ROCE of 10%. In itself, that is a normal return on capital and is in line with the industry average return of 10%.

View our latest analysis for Trakm8 Holdings

Above you can see how the current ROCE for Trakm8 Holdings compares to its past returns on capital, but there is only so much you can tell from the past. If you want to see what analysts are predicting for the future, you should check out our free analyst report for Trakm8 Holdings.

How are returns developing?

Trakm8 Holdings is in the black (profitability) and we are sure it is a sight to behold. The company is now earning 10% on its capital, having been making losses five years ago. What is also interesting is that the amount of invested capital has remained stable, so the company has not had to invest any additional money to generate these higher returns. With no noticeable increase in invested capital, it is worth knowing what the company plans to do in the future in terms of reinvestment and growth of the company. After all, a company can only become so efficient.

As an aside, we noted that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. In fact, the company now has suppliers or short-term creditors financing about 40% of its operations, which is not ideal. Keep an eye on future increases, because if the ratio of current liabilities to total assets becomes particularly high, it could introduce some new risks to the company.

Our opinion on Trakm8 Holdings’ ROCE

In summary, Trakm8 Holdings is generating higher returns on the same capital, which is impressive. Given that the shares are down 67% over the past five years, this could be a good investment if the valuation and other metrics are also attractive. That said, research into the company’s current valuation figures and future prospects seems appropriate.

Since almost every company faces certain risks, it is worth knowing what they are. We have discovered some of these risks. 3 Warning Signs for Trakm8 Holdings (1 of which is significant!) that you need to know.

For those who like to invest in solid companies, look at this free list of companies with solid balance sheets and high return on equity.

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This article from Simply Wall St is general in nature. We comment solely on historical data and analyst forecasts, using an objective methodology. Our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or financial situation. We aim to provide you with a long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in the shares mentioned.

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