There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Peninsula Energy (ASX:PEN) 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. The formula for this calculation on Peninsula Energy is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.068 = US$6.3m ÷ (US$101m - US$8.8m) (Based on the trailing twelve months to June 2021).
So, Peninsula Energy has an ROCE of 6.8%. On its own that's a low return, but compared to the average of 2.9% generated by the Oil and Gas industry, it's much better.
See our latest analysis for Peninsula Energy
Above you can see how the current ROCE for Peninsula Energy compares to its prior returns on capital, but there's only so much you can tell from the past. 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. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 33% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.
The Bottom Line On Peninsula Energy's ROCE
In a nutshell, we're pleased to see that Peninsula Energy has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 53% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
One more thing, we've spotted 3 warning signs facing Peninsula Energy that you might find interesting.
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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About ASX:PEN
Peninsula Energy
Operates as a uranium exploration company in the United States.
Exceptional growth potential with excellent balance sheet.
