Under The Bonnet, Thungela Resources' (JSE:TGA) Returns Look Impressive

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So when we looked at the ROCE trend of Thungela Resources (JSE:TGA) we really liked what we saw.

Understanding 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 Thungela Resources is:

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

0.32 = R8.7b ÷ (R31b - R4.3b) (Based on the trailing twelve months to December 2021).

Therefore, Thungela Resources has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 21%.

View our latest analysis for Thungela Resources

In the above chart we have measured Thungela Resources' 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 Thungela Resources.

So How Is Thungela Resources' ROCE Trending?

We're delighted to see that Thungela Resources is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses one year ago, but now it's earning 32% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Thungela Resources is utilizing 141% more capital than it was one year ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Thungela Resources has decreased current liabilities to 14% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Key Takeaway

Long story short, we're delighted to see that Thungela Resources' reinvestment activities have paid off and the company is now profitable. And with the stock having performed exceptionally well over the last year, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing Thungela Resources we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

Thungela Resources is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.