PrairieSky Royalty's (TSE:PSK) Returns On Capital Are Heading Higher

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at PrairieSky Royalty (TSE:PSK) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for PrairieSky Royalty:

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

0.034 = CA$88m ÷ (CA$2.6b - CA$77m) (Based on the trailing twelve months to June 2021).

So, PrairieSky Royalty has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 5.6%.

Check out our latest analysis for PrairieSky Royalty

Above you can see how the current ROCE for PrairieSky Royalty 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.

How Are Returns Trending?

While there are companies with higher returns on capital out there, we still find the trend at PrairieSky Royalty promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 368% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line On PrairieSky Royalty's ROCE

As discussed above, PrairieSky Royalty appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 38% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, PrairieSky Royalty does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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