Petroreconcavo (BVMF:RECV3) Could Become A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Petroreconcavo's (BVMF:RECV3) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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 Petroreconcavo:

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

0.24 = R$1.3b ÷ (R$6.6b - R$1.4b) (Based on the trailing twelve months to December 2022).

Thus, Petroreconcavo has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 9.9%.

Check out our latest analysis for Petroreconcavo

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

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Petroreconcavo. Over the last five years, returns on capital employed have risen substantially to 24%. 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 1,150%. So we're very much inspired by what we're seeing at Petroreconcavo thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 21% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

In Conclusion...

All in all, it's terrific to see that Petroreconcavo is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 25% in the last year, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about Petroreconcavo, we've spotted 4 warning signs, and 1 of them is potentially serious.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.