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Returns On Capital Are Showing Encouraging Signs At Buru Energy (ASX:BRU)

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  • BRNGF

Did you know there are some financial metrics that can provide clues of a potential 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Buru Energy (ASX:BRU) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Buru Energy is:

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

0.14 = AU$7.5m ÷ (AU$61m - AU$8.5m) (Based on the trailing twelve months to June 2021).

Thus, Buru Energy has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 3.2% it's much better.

See our latest analysis for Buru Energy

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Historical performance is a great place to start when researching a stock so above you can see the gauge for Buru Energy's ROCE against it's prior returns. If you'd like to look at how Buru Energy has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

It's great to see that Buru Energy has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 14% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 47% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

The Bottom Line On Buru Energy's ROCE

In the end, Buru Energy has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 29% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Buru Energy does have some risks, we noticed 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Buru Energy isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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