Yahoo Finance Some Investors May Be Worried About Touchstone Exploration's (TSE:TXP) Returns On Capital
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after briefly looking over the numbers, we don't think Touchstone Exploration (TSE:TXP) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Touchstone Exploration:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = US$5.9m ÷ (US$148m - US$21m) (Based on the trailing twelve months to December 2022).
So, Touchstone Exploration has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 21%.
Check out our latest analysis for Touchstone Exploration
In the above chart we have measured Touchstone Exploration's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Touchstone Exploration.
What The Trend Of ROCE Can Tell Us
We weren't thrilled with the trend because Touchstone Exploration's ROCE has reduced by 57% over the last five years, while the business employed 112% more capital. Usually this isn't ideal, but given Touchstone Exploration conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Touchstone Exploration probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
The Bottom Line On Touchstone Exploration's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Touchstone Exploration. And long term investors must be optimistic going forward because the stock has returned a huge 373% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
One more thing to note, we've identified 1 warning sign with Touchstone Exploration and understanding it should be part of your investment process.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
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