Peninsula Energy (ASX:PEN) Is Experiencing Growth In Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Peninsula Energy (ASX:PEN) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Peninsula Energy, this is the formula:

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

0.033 = US$2.9m ÷ (US$88m - US$1.0m) (Based on the trailing twelve months to December 2021).

Thus, Peninsula Energy has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 12%.

View our latest analysis for Peninsula Energy

In the above chart we have measured Peninsula 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 Peninsula Energy.

What Does the ROCE Trend For Peninsula Energy Tell Us?

We're delighted to see that Peninsula Energy is reaping rewards from its investments and has now broken into profitability. The company now earns 3.3% on its capital, because five years ago it was incurring losses. 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. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a related note, the company's ratio of current liabilities to total assets has decreased to 1.2%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

In summary, we're delighted to see that Peninsula Energy has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 41% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to continue researching Peninsula Energy, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Peninsula Energy may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.