If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of Centaurus Energy (CVE:CTA) 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. Analysts use this formula to calculate it for Centaurus Energy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.36 = US$3.9m ÷ (US$16m - US$5.2m) (Based on the trailing twelve months to September 2024).
Therefore, Centaurus Energy has an ROCE of 36%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 9.4%.
View our latest analysis for Centaurus Energy
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Centaurus Energy.
What The Trend Of ROCE Can Tell Us
It's great to see that Centaurus Energy has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 36% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 80% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.
What We Can Learn From Centaurus Energy's ROCE
In the end, Centaurus Energy has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has dived 87% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
If you want to continue researching Centaurus Energy, you might be interested to know about the 3 warning signs that our analysis has discovered.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.
About TSXV:CTA
Excellent balance sheet and good value.
