Peninsula Energy (ASX:PEN) Might Have The Makings Of A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Peninsula Energy (ASX:PEN) and its trend of ROCE, we really liked what we saw.

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

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. 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)

0.10 = US$8.3m ÷ (US$81m - US$1.2m) (Based on the trailing twelve months to December 2020).

Therefore, Peninsula Energy has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 3.4% generated by the Oil and Gas industry.

Check out 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Peninsula Energy's ROCE Trend?

Like most people, we're pleased that Peninsula Energy is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 10% which is no doubt a relief for some early shareholders. In regards to capital employed, Peninsula Energy is using 42% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Peninsula Energy could be selling under-performing assets since the ROCE is improving.

The Key Takeaway

In summary, it's great to see that Peninsula Energy has been able to turn things around and earn higher returns on lower amounts of capital. However the stock is down a substantial 73% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

If you'd like to know about the risks facing Peninsula Energy, we've discovered 2 warning signs that you should be aware of.

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.
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