Tigers Realm Coal (ASX:TIG) Is Very Good At Capital Allocation

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Tigers Realm Coal's (ASX:TIG) returns on capital, so let's have a look.

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. The formula for this calculation on Tigers Realm Coal is:

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

0.26 = AU$52m ÷ (AU$245m - AU$44m) (Based on the trailing twelve months to December 2022).

So, Tigers Realm Coal has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

Check out our latest analysis for Tigers Realm Coal

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

The Trend Of ROCE

The fact that Tigers Realm Coal is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 26% which is a sight for sore eyes. Not only that, but the company is utilizing 868% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line

Long story short, we're delighted to see that Tigers Realm Coal's reinvestment activities have paid off and the company is now profitable. And since the stock has dived 79% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

One more thing: We've identified 3 warning signs with Tigers Realm Coal (at least 2 which shouldn't be ignored) , and understanding them would certainly be useful.

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.