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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Although, when we looked at Yangarra Resources (TSE:YGR), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
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. The formula for this calculation on Yangarra Resources is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = CA$51m ÷ (CA$849m - CA$23m) (Based on the trailing twelve months to September 2024).
So, Yangarra Resources has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 9.4%.
Check out our latest analysis for Yangarra Resources
Above you can see how the current ROCE for Yangarra Resources 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 Yangarra Resources for free.
What The Trend Of ROCE Can Tell Us
In terms of Yangarra Resources' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.1% from 12% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Key Takeaway
In summary, we're somewhat concerned by Yangarra Resources' diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 2.0% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
On a separate note, we've found 1 warning sign for Yangarra Resources you'll probably want to know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.