Petrol AD's (BUL:PET) Returns On Capital Are Heading Higher

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Petrol AD (BUL:PET) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Petrol AD:

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

0.063 = лв3.7m ÷ (лв151m - лв93m) (Based on the trailing twelve months to June 2022).

So, Petrol AD has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 12%.

Our analysis indicates that PET is potentially undervalued!

Historical performance is a great place to start when researching a stock so above you can see the gauge for Petrol AD's ROCE against it's prior returns. If you're interested in investigating Petrol AD's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We're delighted to see that Petrol AD is reaping rewards from its investments and has now broken into profitability. The company was generating losses four years ago, but has managed to turn it around and as we saw earlier is now earning 6.3%, which is always encouraging. 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. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a side note, Petrol AD's current liabilities are still rather high at 61% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In summary, we're delighted to see that Petrol AD has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has dived 73% over the last three years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

On a final note, we've found 3 warning signs for Petrol AD that we think you should be aware of.

While Petrol AD 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.