Perpetual Energy (TSE:PMT) Shareholders Will Want The ROCE Trajectory To Continue

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Perpetual Energy (TSE:PMT) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Perpetual Energy is:

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

0.17 = CA$33m ÷ (CA$216m - CA$23m) (Based on the trailing twelve months to March 2023).

So, Perpetual Energy has an ROCE of 17%. That's a relatively normal return on capital, and it's around the 19% generated by the Oil and Gas industry.

View our latest analysis for Perpetual Energy

Above you can see how the current ROCE for Perpetual Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Perpetual Energy's ROCE Trending?

You'd find it hard not to be impressed with the ROCE trend at Perpetual Energy. The figures show that over the last five years, returns on capital have grown by 21,049%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Perpetual Energy appears to been achieving more with less, since the business is using 39% 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

In a nutshell, we're pleased to see that Perpetual Energy has been able to generate higher returns from less capital. Given the stock has declined 11% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we found 4 warning signs for Perpetual Energy (1 can't be ignored) you should be aware of.

While Perpetual 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.