Yahoo Finance Berry (NASDAQ:BRY) Could Be Struggling To Allocate Capital
To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Berry (NASDAQ:BRY), we weren't too hopeful.
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. To calculate this metric for Berry, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.032 = US$41m ÷ (US$1.5b - US$262m) (Based on the trailing twelve months to June 2022).
Thus, Berry has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 17%.
See our latest analysis for Berry
In the above chart we have measured Berry's 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 Berry.
What Can We Tell From Berry's ROCE Trend?
We are a bit worried about the trend of returns on capital at Berry. To be more specific, the ROCE was 4.1% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Berry to turn into a multi-bagger.
The Bottom Line
In summary, it's unfortunate that Berry is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 29% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
Berry does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.
While Berry isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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