Peninsula Energy's (ASX:PEN) Returns On Capital Are Heading Higher

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Peninsula Energy's (ASX:PEN) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Peninsula Energy:

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).

So, Peninsula Energy has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 1.3% 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, you can check out the forecasts from the analysts covering Peninsula Energy here for free.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Peninsula Energy is reaping rewards from its investments and has now broken into profitability. 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. Additionally, the business is utilizing 42% 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. Peninsula Energy could be selling under-performing assets since the ROCE is improving.

In Conclusion...

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. Given the stock has declined 68% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

One final note, you should learn about the 3 warning signs we've spotted with Peninsula Energy (including 1 which shouldn't be ignored) .

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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