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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, while the ROCE is currently high for Tigers Realm Coal (ASX:TIG), we aren't jumping out of our chairs because returns are decreasing.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Tigers Realm Coal is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = AU$51m ÷ (AU$215m - AU$29m) (Based on the trailing twelve months to December 2023).
Therefore, Tigers Realm Coal has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.
View our latest analysis for Tigers Realm Coal
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'd like to look at how Tigers Realm Coal has performed in the past in other metrics, you can view this free graph of Tigers Realm Coal's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Tigers Realm Coal, we didn't gain much confidence. Historically returns on capital were even higher at 36%, but they have dropped over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a related note, Tigers Realm Coal has decreased its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.