Stock Analysis

Returns On Capital At S.N.T.G.N. Transgaz (BVB:TGN) Paint An Interesting Picture

BVB:TGN
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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think S.N.T.G.N. Transgaz (BVB:TGN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 S.N.T.G.N. Transgaz, this is the formula:

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

0.035 = RON234m ÷ (RON7.2b - RON617m) (Based on the trailing twelve months to December 2020).

Therefore, S.N.T.G.N. Transgaz has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 6.5%.

Check out our latest analysis for S.N.T.G.N. Transgaz

roce
BVB:TGN Return on Capital Employed March 16th 2021

In the above chart we have measured S.N.T.G.N. Transgaz's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for S.N.T.G.N. Transgaz.

What Can We Tell From S.N.T.G.N. Transgaz's ROCE Trend?

On the surface, the trend of ROCE at S.N.T.G.N. Transgaz doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 3.5%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for S.N.T.G.N. Transgaz. Furthermore the stock has climbed 78% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

One final note, you should learn about the 4 warning signs we've spotted with S.N.T.G.N. Transgaz (including 2 which are a bit unpleasant) .

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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