Yahoo Finance Returns On Capital - An Important Metric For Central Petroleum (ASX:CTP)
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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So when we looked at Central Petroleum (ASX:CTP) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Central Petroleum is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = AU$2.7m ÷ (AU$160m - AU$29m) (Based on the trailing twelve months to June 2020).
So, Central Petroleum has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 4.3%.
View our latest analysis for Central Petroleum
In the above chart we have measured Central Petroleum'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 Can We Tell From Central Petroleum's ROCE Trend?
Central Petroleum has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 2.1% which is a sight for sore eyes. Not only that, but the company is utilizing 86% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
Our Take On Central Petroleum's ROCE
To the delight of most shareholders, Central Petroleum has now broken into profitability. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.
On a final note, we found 4 warning signs for Central Petroleum (2 are a bit concerning) you should be aware of.
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.
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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