Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Yangarra Resources (TSE:YGR) and its trend of ROCE, we really liked what we saw.
What is 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. To calculate this metric for Yangarra Resources, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.044 = CA$27m ÷ (CA$626m - CA$30m) (Based on the trailing twelve months to March 2021).
Therefore, Yangarra Resources has an ROCE of 4.4%. On its own that's a low return, but compared to the average of 1.9% generated by the Oil and Gas industry, it's much better.
View our latest analysis for Yangarra Resources
In the above chart we have measured Yangarra Resources' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Yangarra Resources here for free.
How Are Returns Trending?
The fact that Yangarra Resources is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 4.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Yangarra Resources is utilizing 184% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
On a related note, the company's ratio of current liabilities to total assets has decreased to 4.8%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Yangarra Resources has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Bottom Line On Yangarra Resources' ROCE
Overall, Yangarra Resources gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 9.5% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
If you'd like to know more about Yangarra Resources, we've spotted 3 warning signs, and 1 of them doesn't sit too well with us.
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. 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.
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About TSX:YGR
Yangarra Resources
A junior oil and gas company, engages in the exploration, development, and production of oil and natural gas properties in Western Canada.
Excellent balance sheet and good value.
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