Will The ROCE Trend At Byron Energy (ASX:BYE) Continue?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Byron Energy (ASX:BYE) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Byron Energy:

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

0.019 = US$1.8m ÷ (US$105m - US$11m) (Based on the trailing twelve months to June 2020).

Thus, Byron Energy has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 4.5%.

Check out our latest analysis for Byron Energy

In the above chart we have measured Byron 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 Byron Energy.

What Does the ROCE Trend For Byron Energy Tell Us?

The fact that Byron Energy is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 1.9% on its capital. And unsurprisingly, like most companies trying to break into the black, Byron Energy is utilizing 186% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line On Byron Energy's ROCE

Overall, Byron Energy gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to know some of the risks facing Byron Energy we've found 3 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While Byron 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.

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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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