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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of PetroTal (TSE:TAL) looks great, so lets see what the trend can tell us.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for PetroTal, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = US$158m ÷ (US$746m - US$113m) (Based on the trailing twelve months to September 2024).
Therefore, PetroTal has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 9.4%.
Check out our latest analysis for PetroTal
Above you can see how the current ROCE for PetroTal compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering PetroTal for free.
What Can We Tell From PetroTal's ROCE Trend?
PetroTal has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 25% which is a sight for sore eyes. In addition to that, PetroTal is employing 443% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 15%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that PetroTal has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
Our Take On PetroTal's ROCE
In summary, it's great to see that PetroTal has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 170% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.