Tamar Petroleum (TLV:TMRP) Will Want To Turn Around Its Return Trends

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Tamar Petroleum (TLV:TMRP), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Tamar Petroleum, this is the formula:

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

0.093 = US$108m ÷ (US$1.3b - US$124m) (Based on the trailing twelve months to March 2022).

Thus, Tamar Petroleum has an ROCE of 9.3%. In absolute terms, that's a low return but it's around the Oil and Gas industry average of 10%.

View our latest analysis for Tamar Petroleum

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tamar Petroleum's ROCE against it's prior returns. 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?

When we looked at the ROCE trend at Tamar Petroleum, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.3% from 27% five years ago. 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.

What We Can Learn From Tamar Petroleum's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Tamar Petroleum is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 35% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 4 warning signs with Tamar Petroleum (at least 2 which are significant) , and understanding them would certainly be useful.

While Tamar Petroleum isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.