If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So on that note, Tombador Iron (ASX:TI1) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
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 Tombador Iron, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = AU$1.8m ÷ (AU$39m - AU$4.2m) (Based on the trailing twelve months to December 2021).
Therefore, Tombador Iron has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 9.8%.
See our latest analysis for Tombador Iron
Historical performance is a great place to start when researching a stock so above you can see the gauge for Tombador Iron's ROCE against it's prior returns. If you're interested in investigating Tombador Iron's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Tombador Iron's ROCE Trending?
The fact that Tombador Iron is now generating some pre-tax profits from its prior investments is very encouraging. About one year ago the company was generating losses but things have turned around because it's now earning 5.2% on its capital. In addition to that, Tombador Iron is employing 92% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Bottom Line
To the delight of most shareholders, Tombador Iron has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 50% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.
If you want to continue researching Tombador Iron, you might be interested to know about the 3 warning signs that our analysis has discovered.