Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. 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 Tigers Realm Coal's (ASX:TIG) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Tigers Realm Coal:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = AU$32m ÷ (AU$242m - AU$34m) (Based on the trailing twelve months to June 2022).
Therefore, Tigers Realm Coal has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 10% it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Tigers Realm Coal's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Tigers Realm Coal, check out these free graphs here.
What Does the ROCE Trend For Tigers Realm Coal Tell Us?
The fact that Tigers Realm Coal is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 16% on its capital. Not only that, but the company is utilizing 949% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
Our Take On Tigers Realm Coal's ROCE
Long story short, we're delighted to see that Tigers Realm Coal's reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 63% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
One more thing, we've spotted 1 warning sign facing Tigers Realm Coal that you might find interesting.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
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