Returns At Touchstone Exploration (TSE:TXP) Are On The Way Up

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Touchstone Exploration (TSE:TXP) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Touchstone Exploration, this is the formula:

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

0.043 = US$5.2m ÷ (US$142m - US$20m) (Based on the trailing twelve months to June 2022).

So, Touchstone Exploration has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 18%.

Check out our latest analysis for Touchstone Exploration

Above you can see how the current ROCE for Touchstone Exploration compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Touchstone Exploration here for free.

The Trend Of ROCE

Touchstone Exploration has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 4.3% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Touchstone Exploration is utilizing 129% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

Our Take On Touchstone Exploration's ROCE

To the delight of most shareholders, Touchstone Exploration has now broken into profitability. And a remarkable 864% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

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.