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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Titan Mining's (TSE:TI) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for Titan Mining:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.39 = US$7.2m ÷ (US$55m - US$37m) (Based on the trailing twelve months to December 2024).
Thus, Titan Mining has an ROCE of 39%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 3.8%.
View our latest analysis for Titan Mining
Historical performance is a great place to start when researching a stock so above you can see the gauge for Titan Mining's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Titan Mining.
What Can We Tell From Titan Mining's ROCE Trend?
It's great to see that Titan Mining 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 39% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 64% 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. Titan Mining could be selling under-performing assets since the ROCE is improving.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 66% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.