Tombador Iron (ASX:TI1) Is Looking To Continue Growing Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Tombador Iron (ASX:TI1) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Tombador Iron:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.12 = AU$5.4m ÷ (AU$55m - AU$9.8m) (Based on the trailing twelve months to June 2022).

Therefore, Tombador Iron has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 9.1% it's much better.

See our latest analysis for Tombador Iron

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tombador Iron's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Tombador Iron, check out these free graphs here.

How Are Returns Trending?

Tombador Iron has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses two years ago, but now it's earning 12% which is a sight for sore eyes. In addition to that, Tombador Iron is employing 2,728,349% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Tombador Iron has decreased current liabilities to 18% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

In summary, it's great to see that Tombador Iron has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 15% over the last year, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Tombador Iron (of which 1 can't be ignored!) that you should 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.