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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Timah Resources' (ASX:TML) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for Timah Resources:
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).
Therefore, 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.
What Can We Tell From Timah Resources' ROCE Trend?
Like most people, we're pleased that Timah Resources is now generating some pretax earnings. 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. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 28%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
In Conclusion...
In the end, Timah Resources has proven it's capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 31% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
On a final note, we found 4 warning signs for Timah Resources (3 don't sit too well with us) you should be aware of.