To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Tetra Tech (NASDAQ:TTEK) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Tetra Tech, this is the formula:

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

0.18 = US$539m ÷ (US$4.2b - US$1.3b) (Based on the trailing twelve months to December 2024).

Thus, Tetra Tech has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 10% it's much better.

View our latest analysis for Tetra Tech

In the above chart we have measured Tetra Tech's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Tetra Tech for free.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Tetra Tech. The data shows that returns on capital have increased substantially over the last five years to 18%. The amount of capital employed has increased too, by 78%. So we're very much inspired by what we're seeing at Tetra Tech thanks to its ability to profitably reinvest capital.

Our Take On Tetra Tech's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Tetra Tech has. Since the stock has returned a solid 79% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Tetra Tech, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Tetra Tech isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.