If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher 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.
Understanding 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. To calculate this metric for Trinity Exploration & Production, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.033 = US$3.7m ÷ (US$136m - US$21m) (Based on the trailing twelve months to June 2022).
Therefore, Trinity Exploration & Production has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 11%.
See 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.
The Trend Of ROCE
We're delighted to see that Trinity Exploration & Production is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 3.3% on its capital. And unsurprisingly, like most companies trying to break into the black, Trinity Exploration & Production is utilizing 37% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
In Conclusion...
To the delight of most shareholders, Trinity Exploration & Production has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 37% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.
If you'd like to know more about Trinity Exploration & Production, we've spotted 2 warning signs, and 1 of them can't be ignored.