Source Rock Royalties (CVE:SRR) Is Looking To Continue Growing Its Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Source Rock Royalties (CVE:SRR) and its trend of ROCE, we really liked what we saw.

What Is 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 Source Rock Royalties:

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

0.096 = CA$2.6m ÷ (CA$28m - CA$903k) (Based on the trailing twelve months to March 2023).

Thus, Source Rock Royalties has an ROCE of 9.6%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 14%.

See our latest analysis for Source Rock Royalties

Historical performance is a great place to start when researching a stock so above you can see the gauge for Source Rock Royalties' ROCE against it's prior returns. If you'd like to look at how Source Rock Royalties has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Source Rock Royalties Tell Us?

The fact that Source Rock Royalties is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses three years ago, but now it's earning 9.6% which is a sight for sore eyes. In addition to that, Source Rock Royalties is employing 33% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line

To the delight of most shareholders, Source Rock Royalties has now broken into profitability. Since the stock has returned a solid 13% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Source Rock Royalties does have some risks, we noticed 4 warning signs (and 2 which can't be ignored) we think you should know about.

While Source Rock Royalties may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.