Pulse Oil (CVE:PUL) 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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Pulse Oil (CVE:PUL) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Pulse Oil is:

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

0.075 = CA$2.2m ÷ (CA$31m - CA$1.8m) (Based on the trailing twelve months to September 2022).

Thus, Pulse Oil has an ROCE of 7.5%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 21%.

See our latest analysis for Pulse Oil

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

The Trend Of ROCE

The fact that Pulse Oil 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 7.5% which is a sight for sore eyes. In addition to that, Pulse Oil is employing 375% more capital than previously which is expected of a company that's trying to break into profitability. 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.

What We Can Learn From Pulse Oil's ROCE

In summary, it's great to see that Pulse Oil has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 61% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing: We've identified 4 warning signs with Pulse Oil (at least 2 which are a bit unpleasant) , and understanding these would certainly be useful.

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.

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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.