There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Topaz Energy (TSE:TPZ) so let's look a bit deeper.

Our free stock report includes 2 warning signs investors should be aware of before investing in Topaz Energy. Read for free now.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Topaz Energy:

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

0.051 = CA$97m ÷ (CA$1.9b - CA$12m) (Based on the trailing twelve months to December 2024).

Therefore, Topaz Energy has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 9.2%.

View our latest analysis for Topaz Energy TSX:TPZ Return on Capital Employed May 5th 2025

Above you can see how the current ROCE for Topaz Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Topaz Energy  for free.

What Does the ROCE Trend For Topaz Energy Tell Us?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 5.1%. Basically the business is earning more per dollar of capital invested and in addition to that, 170% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Key Takeaway

All in all, it's terrific to see that Topaz Energy is reaping the rewards from prior investments and is growing its capital base. Investors may not be impressed by the favorable underlying trends yet because over the last three years the stock has only returned 22% to shareholders. So with that in mind, we think the stock deserves further research.

If you want to know some of the risks facing Topaz Energy we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

Story Continues

For those who like to invest in solid companies, check out this freelist 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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