Capital Allocation Trends At Touchstone Exploration (TSE:TXP) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Touchstone Exploration (TSE:TXP), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Touchstone Exploration is:

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

0.0096 = US$1.2m ÷ (US$154m - US$31m) (Based on the trailing twelve months to September 2023).

Therefore, Touchstone Exploration has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 10%.

View our latest analysis for Touchstone Exploration

In the above chart we have measured Touchstone Exploration's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

We weren't thrilled with the trend because Touchstone Exploration's ROCE has reduced by 95% over the last five years, while the business employed 95% more capital. That being said, Touchstone Exploration raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Touchstone Exploration probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line

In summary, Touchstone Exploration is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 323% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Like most companies, Touchstone Exploration does come with some risks, and we've found 1 warning sign that you should be aware of.

While Touchstone Exploration may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.