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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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Timah Resources (ASX:TML) and its trend of ROCE, we really liked what we saw.
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 Timah Resources is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0099 = RM539k ÷ (RM55m - RM529k) (Based on the trailing twelve months to June 2024).
So, Timah Resources has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 8.7%.
See our latest analysis for Timah Resources
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Timah Resources.
So How Is Timah Resources' ROCE Trending?
It's great to see that Timah Resources has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 1.0% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 28% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
What We Can Learn From Timah Resources' ROCE
In a nutshell, we're pleased to see that Timah Resources has been able to generate higher returns from less capital. Given the stock has declined 35% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
One final note, you should learn about the 4 warning signs we've spotted with Timah Resources (including 3 which don't sit too well with us) .