Teekay Tankers (NYSE:TNK) Is Looking To Continue Growing Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Speaking of which, we noticed some great changes in Teekay Tankers' (NYSE:TNK) returns on capital, so let's have a look.

Understanding 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 Teekay Tankers, this is the formula:

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

0.052 = US$76m ÷ (US$1.6b - US$175m) (Based on the trailing twelve months to September 2022).

So, Teekay Tankers has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 21%.

Check out our latest analysis for Teekay Tankers

In the above chart we have measured Teekay Tankers' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Teekay Tankers here for free.

What The Trend Of ROCE Can Tell Us

Teekay Tankers' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 187% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line On Teekay Tankers' ROCE

To sum it up, Teekay Tankers is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 341% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While Teekay Tankers looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether TNK is currently trading for a fair price.

While Teekay Tankers 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.