The Returns At Tamar Petroleum (TLV:TMRP) Provide Us With Signs Of What's To Come

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Tamar Petroleum (TLV:TMRP) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Tamar Petroleum is:

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

0.14 = US$169m ÷ (US$1.3b - US$99m) (Based on the trailing twelve months to June 2020).

So, Tamar Petroleum has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 15% generated by the Oil and Gas industry.

Check out 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're interested in investigating Tamar Petroleum's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Tamar Petroleum's ROCE Trending?

In terms of Tamar Petroleum's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 25%, but since then they've fallen to 14%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Tamar Petroleum's ROCE

We're a bit apprehensive about Tamar Petroleum because despite more capital being deployed in the business, returns on that capital and sales have both fallen. This could explain why the stock has sunk a total of 84% in the last three years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we've found 3 warning signs for Tamar Petroleum that we think 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. 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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