Slowing Rates Of Return At Beach Energy (ASX:BPT) Leave Little Room For Excitement

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Beach Energy's (ASX:BPT) ROCE trend, we were pretty happy with what we saw.

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 Beach Energy:

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

0.10 = AU$547m ÷ (AU$5.9b - AU$444m) (Based on the trailing twelve months to June 2023).

So, Beach Energy has an ROCE of 10%. In absolute terms, that's a pretty standard return but compared to the Oil and Gas industry average it falls behind.

View our latest analysis for Beach Energy

In the above chart we have measured Beach Energy'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 Beach Energy.

The Trend Of ROCE

While the returns on capital are good, they haven't moved much. The company has employed 52% more capital in the last five years, and the returns on that capital have remained stable at 10%. 10% is a pretty standard return, and it provides some comfort knowing that Beach Energy has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line On Beach Energy's ROCE

To sum it up, Beach Energy has simply been reinvesting capital steadily, at those decent rates of return. In light of this, the stock has only gained 31% over the last five years for shareholders who have owned the stock in this period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

Beach Energy could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

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.

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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.