Is There More Growth In Store For Hemisphere Energy's (CVE:HME) Returns On Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Hemisphere Energy (CVE:HME) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

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 Hemisphere Energy is:

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

0.12 = CA$6.7m ÷ (CA$56m - CA$1.2m) (Based on the trailing twelve months to September 2020).

So, Hemisphere Energy has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 6.3% it's much better.

See our latest analysis for Hemisphere Energy

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hemisphere Energy's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hemisphere Energy, check out these free graphs here.

What Can We Tell From Hemisphere Energy's ROCE Trend?

The fact that Hemisphere Energy is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 12% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Hemisphere Energy is utilizing 80% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 2.1%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Hemisphere Energy has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Hemisphere Energy's ROCE

Overall, Hemisphere Energy gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Considering the stock has delivered 40% 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.

One final note, you should learn about the 2 warning signs we've spotted with Hemisphere Energy (including 1 which is makes us a bit uncomfortable) .

While Hemisphere 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. 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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