Trinity Exploration & Production (LON:TRIN) Is Experiencing Growth In Returns On Capital
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Trinity Exploration & Production (LON:TRIN) so let's look a bit deeper.
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 Trinity Exploration & Production:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.035 = US$3.8m ÷ (US$124m - US$13m) (Based on the trailing twelve months to December 2022).
Therefore, Trinity Exploration & Production has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 11%.
Check out our latest analysis for Trinity Exploration & Production
Above you can see how the current ROCE for Trinity Exploration & Production compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Trinity Exploration & Production.
What Can We Tell From Trinity Exploration & Production's ROCE Trend?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 3.5%. Basically the business is earning more per dollar of capital invested and in addition to that, 20% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Key Takeaway
All in all, it's terrific to see that Trinity Exploration & Production is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 55% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.
If you want to continue researching Trinity Exploration & Production, you might be interested to know about the 4 warning signs that our analysis has discovered.
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.
