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Returns On Capital At Tamar Petroleum (TLV:TMRP) Paint A Concerning Picture
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Tamar Petroleum (TLV:TMRP), it didn't seem to tick all of these boxes.
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 Tamar Petroleum is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$116m ÷ (US$1.2b - US$113m) (Based on the trailing twelve months to September 2022).
So, Tamar Petroleum has an ROCE of 10%. In isolation, that's a pretty standard return but against the Oil and Gas industry average of 16%, it's not as good.
Check out the opportunities and risks within the IL Oil and Gas industry.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Tamar Petroleum, check out these free graphs here.
What Does the ROCE Trend For Tamar Petroleum Tell Us?
On the surface, the trend of ROCE at Tamar Petroleum doesn't inspire confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 10%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On Tamar Petroleum's ROCE
While returns have fallen for Tamar Petroleum in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 21% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
If you'd like to know more about Tamar Petroleum, we've spotted 5 warning signs, and 2 of them don'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.
Valuation is complex, but we're here to simplify it.
Discover if Tamar Petroleum might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
About TASE:TMRP
Tamar Petroleum
Engages in the exploration, development, production, marketing, and transmission of natural gas and condensate in Israel.
Proven track record with mediocre balance sheet.