Byron Energy (ASX:BYE) Shareholders Will Want The ROCE Trajectory To Continue

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Byron Energy (ASX:BYE) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Byron Energy, this is the formula:

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

0.15 = US$15m ÷ (US$126m - US$22m) (Based on the trailing twelve months to December 2021).

Thus, Byron Energy has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 12% generated by the Oil and Gas industry.

Check out our latest analysis for Byron Energy

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

The Trend Of ROCE

Byron Energy 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 15% which is a sight for sore eyes. In addition to that, Byron Energy is employing 1,176% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line

Long story short, we're delighted to see that Byron Energy's reinvestment activities have paid off and the company is now profitable. And with a respectable 86% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 1 warning sign with Byron Energy and understanding this should be part of your investment process.

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.