Stock Analysis

Why The 20% Return On Capital At Petro Rio (BVMF:PRIO3) Should Have Your Attention

BOVESPA:PRIO3
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Petro Rio's (BVMF:PRIO3) returns on capital, so let's have a look.

Understanding 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. Analysts use this formula to calculate it for Petro Rio:

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

0.20 = R$4.5b ÷ (R$26b - R$3.2b) (Based on the trailing twelve months to March 2023).

So, Petro Rio has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 9.9% earned by companies in a similar industry.

View our latest analysis for Petro Rio

roce
BOVESPA:PRIO3 Return on Capital Employed May 8th 2023

Above you can see how the current ROCE for Petro Rio 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 Petro Rio here for free.

SWOT Analysis for Petro Rio

Strength
  • Debt is well covered by earnings and cashflows.
Weakness
  • Earnings growth over the past year underperformed the Oil and Gas industry.
Opportunity
  • Annual earnings are forecast to grow faster than the Brazilian market.
  • Trading below our estimate of fair value by more than 20%.
Threat
  • Revenue is forecast to grow slower than 20% per year.

How Are Returns Trending?

The trends we've noticed at Petro Rio are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 20%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 2,056%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line On Petro Rio's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Petro Rio has. Since the stock has returned a staggering 2,448% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Petro Rio can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 2 warning signs with Petro Rio (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.