Topaz Energy (TSE:TPZ) Might Have The Makings Of A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. So on that note, Topaz Energy (TSE:TPZ) looks quite promising in regards to its trends of return on capital.

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 Topaz Energy:

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

0.03 = CA$47m ÷ (CA$1.6b - CA$17m) (Based on the trailing twelve months to March 2022).

Thus, Topaz Energy has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 12%.

View our latest analysis for Topaz Energy

In the above chart we have measured Topaz Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Topaz Energy.

What Does the ROCE Trend For Topaz Energy Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last two years to 3.0%. The amount of capital employed has increased too, by 100%. So we're very much inspired by what we're seeing at Topaz Energy thanks to its ability to profitably reinvest capital.

Our Take On Topaz Energy's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Topaz Energy has. Since the stock has returned a solid 27% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Topaz Energy can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Topaz Energy, we've discovered 2 warning signs that you should be aware of.

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.