Returns Are Gaining Momentum At Bonterra Energy (TSE:BNE)

Did you know there are some financial metrics that can provide clues of a potential 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. So on that note, Bonterra Energy (TSE:BNE) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Bonterra Energy, this is the formula:

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

0.092 = CA$76m ÷ (CA$948m - CA$124m) (Based on the trailing twelve months to September 2022).

Therefore, Bonterra Energy has an ROCE of 9.2%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 20%.

Check out our latest analysis for Bonterra Energy

Historical performance is a great place to start when researching a stock so above you can see the gauge for Bonterra Energy's ROCE against it's prior returns. If you'd like to look at how Bonterra Energy has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Bonterra Energy has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 450%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Bonterra Energy appears to been achieving more with less, since the business is using 25% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Bottom Line

From what we've seen above, Bonterra Energy has managed to increase it's returns on capital all the while reducing it's capital base. Astute investors may have an opportunity here because the stock has declined 56% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Bonterra Energy does have some risks though, and we've spotted 3 warning signs for Bonterra Energy that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.