Investors Shouldn't Overlook Talos Energy's (NYSE:TALO) Impressive Returns On Capital
There are a few key trends to look for if we want to identify the next multi-bagger. 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. And in light of that, the trends we're seeing at Talos Energy's (NYSE:TALO) look very promising so lets take 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. To calculate this metric for Talos Energy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = US$504m ÷ (US$3.1b - US$607m) (Based on the trailing twelve months to December 2022).
Thus, Talos Energy has an ROCE of 21%. On its own that's a fantastic return on capital, though it's the same as the Oil and Gas industry average of 21%.
See our latest analysis for Talos Energy
In the above chart we have measured Talos Energy'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 Talos Energy.
The Trend Of ROCE
The trends we've noticed at Talos Energy are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 21%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 168%. So we're very much inspired by what we're seeing at Talos Energy thanks to its ability to profitably reinvest capital.
The Bottom Line
In summary, it's great to see that Talos Energy can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 89% return over the last three years. In light of that, we think it's worth looking further into this stock because if Talos Energy can keep these trends up, it could have a bright future ahead.
One final note, you should learn about the 2 warning signs we've spotted with Talos Energy (including 1 which is concerning) .
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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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