Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. And in light of that, the trends we're seeing at Parex Resources' (TSE:PXT) look very promising so lets take 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. Analysts use this formula to calculate it for Parex Resources:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.45 = US$770m ÷ (US$2.1b - US$384m) (Based on the trailing twelve months to September 2022).
Therefore, Parex Resources has an ROCE of 45%. That's a fantastic return and not only that, it outpaces the average of 21% earned by companies in a similar industry.
Check out our latest analysis for Parex Resources
Above you can see how the current ROCE for Parex Resources 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 Parex Resources' ROCE Trending?
Parex Resources is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 45%. The amount of capital employed has increased too, by 84%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line
To sum it up, Parex Resources has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 15% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
Like most companies, Parex Resources does come with some risks, and we've found 1 warning sign that you should be aware of.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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.
About TSX:PXT
Parex Resources
Engages in the exploration, development, production, and marketing of oil and natural gas in Colombia.
Undervalued with excellent balance sheet and pays a dividend.
