Tesla (NASDAQ:TSLA)’s return trends look promising

What early trends should we look for to identify a stock that could multiply in value over the long term? Typically we want to notice a growth trend return on capital employed (ROCE) and, as a result, a growing one base of the capital employed. When you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we’ve noticed some great changes Teslas (NASDAQ:TSLA) return on capital, so let’s take a look.

What is Return on Capital Employed (ROCE)?

Just to clarify in case you’re not sure, ROCE is a measure used to evaluate how much pre-tax income (as a percentage) a company earns from the capital invested in its business. Analysts use this formula to calculate it for Tesla:

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

0.084 = $7.2 billion ÷ ($113 billion – $28 billion) (Based on the last twelve months ended June 2024).

So, Tesla has an ROCE of 8.4%. On its own, that’s a low return on capital, but it’s in line with the industry average return of 8.4%.

Check out our latest analysis for Tesla

In the chart above, we measured Tesla’s past ROCE compared to its previous performance, but the future is arguably more important. If you are interested, you can see the analyst forecasts in our free Analyst report for Tesla.

What can we say about Tesla’s ROCE trend?

We are pleased that ROCE is moving in the right direction, even if it is currently low. The data shows that the return on capital increased significantly over the last five years to 8.4%. The company is effectively making more money per dollar of capital employed, and it’s worth noting that the amount of capital has also increased by 282%. The increasing returns on a growing amount of capital are common with multi-baggers and that’s why we’re impressed.

What we can learn from Tesla’s ROCE

In summary, it’s great to see that Tesla can increase its returns by continually reinvesting its capital at increasing returns, as these are some of the key ingredients of the sought-after multi-baggers. With the stock returning an incredible 909% to shareholders over the last five years, it looks like investors are recognizing these changes. Given that the stock is showing promising trends, it is worth further researching the company to determine whether these trends are likely to continue.

If you want to know more about the risks Tesla faces, we found out 1 warning sign what you should be aware of.

While Tesla may not have the highest returns right now, we’ve put together a list of companies that currently have a return on equity of more than 25%. Check this out free List here.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any stocks mentioned.