Petro Rio (BVMF:PRIO3) Shareholders Will Want The ROCE Trajectory To Continue

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we've noticed some promising trends at Petro Rio (BVMF:PRIO3) so let's look a bit deeper.

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. The formula for this calculation on Petro Rio is:

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

0.19 = R$1.9b ÷ (R$11b - R$1.2b) (Based on the trailing twelve months to September 2021).

Thus, Petro Rio has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 8.2% it's much better.

See our latest analysis for Petro Rio

In the above chart we have measured Petro Rio'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 Petro Rio's ROCE Trend?

The fact that Petro Rio is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 19% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Petro Rio is utilizing 894% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

What We Can Learn From Petro Rio's ROCE

Long story short, we're delighted to see that Petro Rio's reinvestment activities have paid off and the company is now profitable. And a remarkable 5,897% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 2 warning signs with Petro Rio and understanding these should be part of your investment process.

While Petro Rio isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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