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There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Tidewater Renewables (TSE:LCFS) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Tidewater Renewables is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = CA$35m ÷ (CA$420m - CA$78m) (Based on the trailing twelve months to September 2024).
Thus, Tidewater Renewables has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 9.4% generated by the Oil and Gas industry.
View our latest analysis for Tidewater Renewables
Above you can see how the current ROCE for Tidewater Renewables compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Tidewater Renewables .
What Can We Tell From Tidewater Renewables' ROCE Trend?
Tidewater Renewables has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last two years have risen by 244%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 58% less capital than it was two years ago. Tidewater Renewables may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
In Conclusion...
In the end, Tidewater Renewables has proven it's capital allocation skills are good with those higher returns from less amount of capital. However the stock is down a substantial 94% in the last three years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
On a final note, we've found 2 warning signs for Tidewater Renewables that we think you should be aware of.