Some Investors May Be Worried About Tharisa's (JSE:THA) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Looking at Tharisa (JSE:THA), it does have a high ROCE right now, but lets see how returns are trending.

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. Analysts use this formula to calculate it for Tharisa:

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

0.20 = US$161m ÷ (US$1.0b - US$199m) (Based on the trailing twelve months to March 2022).

So, Tharisa has an ROCE of 20%. In absolute terms that's a very respectable return and compared to the Metals and Mining industry average of 24% it's pretty much on par.

Check out the opportunities and risks within the ZA Metals and Mining industry.

In the above chart we have measured Tharisa's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Tharisa Tell Us?

On the surface, the trend of ROCE at Tharisa doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 31%. 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.

What We Can Learn From Tharisa's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Tharisa. And the stock has followed suit returning a meaningful 42% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Tharisa (of which 1 doesn't sit too well with us!) that you should know about.

Tharisa 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.