Does Central Petroleum (ASX:CTP) Have The Makings Of A Multi-Bagger?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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, Central Petroleum (ASX:CTP) 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 Central Petroleum is:

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

0.012 = AU$1.8m ÷ (AU$171m - AU$26m) (Based on the trailing twelve months to December 2020).

So, Central Petroleum has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 5.0%.

Check out our latest analysis for Central Petroleum

Above you can see how the current ROCE for Central Petroleum compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Central Petroleum here for free.

What Does the ROCE Trend For Central Petroleum Tell Us?

We're delighted to see that Central Petroleum is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 1.2%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

The Bottom Line

To bring it all together, Central Petroleum has done well to increase the returns it's generating from its capital employed. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 33% to shareholders. So with that in mind, we think the stock deserves further research.

One more thing: We've identified 4 warning signs with Central Petroleum (at least 2 which are potentially serious) , and understanding them would certainly be useful.

While Central Petroleum 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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