There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, we've noticed some promising trends at Cue Energy Resources (ASX:CUE) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Cue Energy Resources is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.065 = AU$4.2m ÷ (AU$69m - AU$4.6m) (Based on the trailing twelve months to June 2020).
So, Cue Energy Resources has an ROCE of 6.5%. In absolute terms, that's a low return, but it's much better than the Oil and Gas industry average of 4.3%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Cue Energy Resources' ROCE against it's prior returns. If you're interested in investigating Cue Energy Resources' past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Cue Energy Resources' ROCE Trending?
We're pretty happy with how the ROCE has been trending at Cue Energy Resources. The data shows that returns on capital have increased by 156% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Cue Energy Resources appears to been achieving more with less, since the business is using 57% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
The Bottom Line On Cue Energy Resources' ROCE
In a nutshell, we're pleased to see that Cue Energy Resources has been able to generate higher returns from less capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a final note, we've found 2 warning signs for Cue Energy Resources that we think you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
This article by Simply Wall St is general in nature. 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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