CF Energy (CVE:CFY) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. In light of that, when we looked at CF Energy (CVE:CFY) and its ROCE trend, we weren't exactly thrilled.

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 CF Energy:

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

0.036 = CN¥30m ÷ (CN¥1.2b - CN¥398m) (Based on the trailing twelve months to September 2022).

Thus, CF Energy has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Gas Utilities industry average of 5.4%.

Check out our latest analysis for CF Energy

Historical performance is a great place to start when researching a stock so above you can see the gauge for CF Energy's ROCE against it's prior returns. If you're interested in investigating CF Energy's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For CF Energy Tell Us?

When we looked at the ROCE trend at CF Energy, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.6% from 22% five years ago. However it looks like CF Energy might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

In summary, CF Energy is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 69% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing CF Energy we've found 6 warning signs (3 don't sit too well with us!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.