Will The ROCE Trend At Cue Energy Resources (ASX:CUE) Continue?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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, Cue Energy Resources (ASX:CUE) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

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 Cue Energy Resources, this is the formula:

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

0.065 = AU$4.2m ÷ (AU$69m - AU$4.6m) (Based on the trailing twelve months to June 2020).

Therefore, Cue Energy Resources has an ROCE of 6.5%. In absolute terms, that's a low return, but it's much better than the Oil and Gas industry average of 4.5%.

Check out our latest analysis for Cue Energy Resources

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

What Can We Tell From Cue Energy Resources' ROCE Trend?

Cue Energy Resources has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 156%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 57% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Bottom Line On Cue Energy Resources' ROCE

From what we've seen above, Cue Energy Resources has managed to increase it's returns on capital all the while reducing it's capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 37% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Cue Energy Resources does have some risks though, and we've spotted 3 warning signs for Cue Energy Resources that you might be interested in.

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.

When trading Cue Energy Resources or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.