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. 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 Talos Energy's (NYSE:TALO) returns on capital, so let's have a look.
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. To calculate this metric for Talos Energy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$320m ÷ (US$2.9b - US$701m) (Based on the trailing twelve months to June 2022).
Thus, Talos Energy has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Oil and Gas industry average of 16%.
In the above chart we have measured Talos Energy'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 Talos Energy Tell Us?
The fact that Talos Energy is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 15% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Talos Energy is utilizing 123% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
What We Can Learn From Talos Energy's ROCE
Overall, Talos Energy gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Given the stock has declined 26% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Talos Energy does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is 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. 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.
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