If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Tootsie Roll Industries' (NYSE:TR) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Tootsie Roll Industries:

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

0.12 = US$112m ÷ (US$1.1b - US$106m) (Based on the trailing twelve months to September 2023).

So, Tootsie Roll Industries has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 10% generated by the Food industry.

See our latest analysis for Tootsie Roll Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tootsie Roll Industries' ROCE against it's prior returns. If you're interested in investigating Tootsie Roll Industries' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Tootsie Roll Industries' ROCE Trending?

Tootsie Roll Industries has not disappointed with their ROCE growth. 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 42% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. 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 Key Takeaway

As discussed above, Tootsie Roll Industries appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has only returned 7.6% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.