If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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 TPXimpact Holdings' (LON:TPX) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for TPXimpact Holdings, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.015 = UK£1.3m ÷ (UK£110m - UK£21m) (Based on the trailing twelve months to September 2021).

Thus, TPXimpact Holdings has an ROCE of 1.5%.  Ultimately, that's a low return and it under-performs the IT industry average of 14%.

See our latest analysis for TPXimpact Holdings  roce

Above you can see how the current ROCE for TPXimpact Holdings 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 freereport for TPXimpact Holdings.

So How Is TPXimpact Holdings' ROCE Trending?

TPXimpact Holdings has recently broken into profitability so their prior investments seem to be paying off. About three years ago the company was generating losses but things have turned around because it's now earning 1.5% on its capital. Not only that, but the company is utilizing 1,485% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.



On a related note, the company's ratio of current liabilities to total assets has decreased to 19%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that TPXimpact Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From TPXimpact Holdings' ROCE

In summary, it's great to see that TPXimpact Holdings has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 192% total return over the last three years tells us that investors are expecting more good things to come in the future. 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.

One more thing, we've spotted  2 warning signs  facing TPXimpact Holdings that you might find interesting.

While TPXimpact Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this freelist here.

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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.