Pipestone Energy (TSE:PIPE) Is Experiencing Growth In Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Pipestone Energy's (TSE:PIPE) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Pipestone Energy is:

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

0.0032 = CA$2.2m ÷ (CA$778m - CA$101m) (Based on the trailing twelve months to June 2021).

Thus, Pipestone Energy has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 5.5%.

View our latest analysis for Pipestone Energy

In the above chart we have measured Pipestone Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Pipestone Energy.

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last three years, returns on capital employed have risen substantially to 0.3%. 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 461%. So we're very much inspired by what we're seeing at Pipestone Energy thanks to its ability to profitably reinvest capital.

Our Take On Pipestone Energy's ROCE

To sum it up, Pipestone Energy has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 142% to shareholders over the last year, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Pipestone Energy can keep these trends up, it could have a bright future ahead.

If you'd like to know more about Pipestone Energy, we've spotted 3 warning signs, and 1 of them is concerning.

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

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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.
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