The Return Trends At AXP Energy (ASX:AXP) Look Promising

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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, AXP Energy (ASX:AXP) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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 AXP Energy:

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

0.036 = US$874k ÷ (US$31m - US$6.6m) (Based on the trailing twelve months to June 2022).

Therefore, AXP Energy has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 13%.

View our latest analysis for AXP Energy

Historical performance is a great place to start when researching a stock so above you can see the gauge for AXP Energy's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of AXP Energy, check out these free graphs here.

What Can We Tell From AXP Energy's ROCE Trend?

AXP Energy has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 3.6% on its capital. In addition to that, AXP Energy is employing 147% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Key Takeaway

To the delight of most shareholders, AXP Energy has now broken into profitability. Given the stock has declined 33% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

AXP Energy does have some risks, we noticed 5 warning signs (and 1 which is significant) we think you should know about.

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.

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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.