Yangarra Resources (TSE:YGR) Is Experiencing Growth In Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Yangarra Resources (TSE:YGR) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Yangarra Resources is:

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

0.15 = CA$111m ÷ (CA$799m - CA$34m) (Based on the trailing twelve months to June 2023).

Therefore, Yangarra Resources has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Oil and Gas industry average of 13%.

Check out our latest analysis for Yangarra Resources

Above you can see how the current ROCE for Yangarra Resources compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Yangarra Resources' ROCE Trending?

Investors would be pleased with what's happening at Yangarra Resources. The data shows that returns on capital have increased substantially over the last five years to 15%. The amount of capital employed has increased too, by 100%. So we're very much inspired by what we're seeing at Yangarra Resources thanks to its ability to profitably reinvest capital.

What We Can Learn From Yangarra Resources' ROCE

In summary, it's great to see that Yangarra Resources can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Astute investors may have an opportunity here because the stock has declined 54% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

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

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.