What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Speaking of which, we noticed some great changes in Teradata’s (NYSE:TDC) returns on capital, so let’s have a look.
Understanding 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. To calculate this metric for Teradata, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.25 = US$184m ÷ (US$1.6b – US$889m) (Based on the trailing twelve months to June 2024).
Therefore, Teradata has an ROCE of 25%. In absolute terms that’s a great return and it’s even better than the Software industry average of 8.6%.
See our latest analysis for Teradata
Above you can see how the current ROCE for Teradata 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 Teradata .
What The Trend Of ROCE Can Tell Us
You’d find it hard not to be impressed with the ROCE trend at Teradata. The data shows that returns on capital have increased by 345% over the trailing five years. The company is now earning US$0.3 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it’s applying 42% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it’s shrinking in terms of total assets.
For the record though, there was a noticeable increase in the company’s current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 55% of the business, which is more than it was five years ago. And with current liabilities at those levels, that’s pretty high.
The Key Takeaway
In a nutshell, we’re pleased to see that Teradata has been able to generate higher returns from less capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 10% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
If you want to continue researching Teradata, you might be interested to know about the 2 warning signs that our analysis has discovered.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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.
