If you want to find stocks with long-term growth potential, what underlying trends should you look for? One common approach is to look for companies that: Return value Capital employed increasing with growth (ROCE) amount of capital employed. Simply put, this type of business is a compound interest machine, meaning you are continually reinvesting your earnings at an ever-higher rate of return. So, I did a quick search and found that Tetra Tech's (NASDAQ:TTEK) ROCE Trend, we were pretty happy with what we saw.
About Return on Capital Employed (ROCE)
For those who have never used ROCE before, it measures the “return” (pre-tax profit) that a company generates from the capital employed in its business. The formula for this calculation in Tetra Tech is:
Return on Capital Employed = Earnings before interest and tax (EBIT) ÷ (Total assets – Current liabilities)
0.16 = USD 434 million ÷ (USD 4 billion – USD 1.2 billion) (Based on the previous 12 months to December 2023).
therefore, Tetra Tech's ROCE is 16%. In absolute terms, this is a satisfactory return, but compared to the commercial services industry average of 10%, it is much better.
Check out our latest analysis for Tetra Tech.
In the chart above, we measured Tetra Tech's previous ROCE against its previous performance, but the future is probably more important. If you would like to see what analysts are predicting for the future, check out our free analyst report for Tetra Tech.
What does Tetra Tech's ROCE trend indicate?
Return on capital is good, but hasn't changed much. The company has consistently had a return of 16% over the past five years, and during that time the capital employed within the business has increased by 114%. However, 16% is a middling ROCE for him, so it's good that the company can continue to reinvest at such a decent rate of return. Over the long term, such returns may not be as attractive, but if they are consistent, they can pay off in terms of stock returns.
The conclusion is…
The main thing to remember is that Tetra Tech has demonstrated the ability to continually reinvest at substantial rates of return. And long-term investors will be delighted with his 213% return over the past five years. As such, we believe the stock's strong fundamentals make it worthy of further research, even if the stock is now more “expensive” than it was previously.
However, Tetra Tech has some risks that we discovered 3 warning signs for Tetra Tech What you might be interested in.
While Tetra Tech doesn't have the highest profit margin at the moment, we've compiled a list of companies that currently have a return on equity above 25%.check this out free I'll list them here.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
