Timah Resources (ASX:TML) Is Looking To Continue Growing Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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, Timah Resources (ASX:TML) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Timah Resources is:

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

0.0099 = RM539k ÷ (RM55m - RM529k) (Based on the trailing twelve months to June 2024).

So, Timah Resources has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 8.7%.

View our latest analysis for Timah Resources

Historical performance is a great place to start when researching a stock so above you can see the gauge for Timah Resources' ROCE against it's prior returns. If you'd like to look at how Timah Resources has performed in the past in other metrics, you can view this free graph of Timah Resources' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Timah Resources is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Timah Resources is using 28% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

In Conclusion...

In the end, Timah Resources has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 27% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know more about Timah Resources, we've spotted 4 warning signs, and 3 of them are concerning.

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.