Under the hood, returns from Thungela Resources (JSE:TGA) 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 watch out for. A common approach is to try to find a company with Return on capital employed (ROCE) which is increasing, in line with growth amount capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating 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’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. The formula for this calculation on Thunela 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 last twelve months to December 2021).

Therefore, Thungela Resources has a ROCE of 32%. In absolute terms, this is an excellent return and is even better than the oil and gas industry average of 21%.

Check out our latest analysis for Thunela Resources

JSE:TGA Return on Capital Employed June 15, 2022

In the chart above, we measured Thungela Resources’ past ROCE against its past performance, but the future is arguably more important. If you want to see what analysts predict for the future, you should check out our free report for Thungela Resources.

So, what is the ROCE trend for Thungela Resources?

We are delighted to see that Thungela Resources is reaping the rewards of its investments and is now generating pre-tax profits. The company was generating losses a year ago, but is now gaining 32%, which is a feast for the eyes. And unsurprisingly, like most companies trying to break into the dark, Thungela Resources is using 141% more capital than a year ago. This can tell us that the business has plenty of reinvestment opportunities that can generate higher returns.

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

The Key Takeaway

In short, we are pleased to see that Thungela Resources’ reinvestment activities have paid off and the company is now profitable. And since the stock has performed exceptionally well over the past year, these trends are priced in by investors. Therefore, we think it would be worth checking whether these trends will continue.

If you want to know some of the risks Thungela Resources faces, we found 3 warning signs (1 doesn’t suit us too much!) which you should be aware of before investing here.

Thungela Resources is not the only stock to generate high returns. If you want to see more, check out our free list of companies with high returns on equity with strong fundamentals.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.