Returns On Capital At Senton EnergyLtd (SZSE:001331) Have Hit The Brakes

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. That's why when we briefly looked at Senton EnergyLtd's (SZSE:001331) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Senton EnergyLtd is:

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

0.10 = CN¥166m ÷ (CN¥1.7b - CN¥126m) (Based on the trailing twelve months to December 2022).

Thus, Senton EnergyLtd has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 9.2% generated by the Gas Utilities industry.

Check out our latest analysis for Senton EnergyLtd

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

What Can We Tell From Senton EnergyLtd's ROCE Trend?

While the current returns on capital are decent, they haven't changed much. Over the past four years, ROCE has remained relatively flat at around 10% and the business has deployed 279% more capital into its operations. Since 10% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, Senton EnergyLtd has done well to reduce current liabilities to 7.3% of total assets over the last four years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On Senton EnergyLtd's ROCE

In the end, Senton EnergyLtd has proven its ability to adequately reinvest capital at good rates of return. However, despite the favorable fundamentals, the stock has fallen 46% over the last year, so there might be an opportunity here for astute investors. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

One more thing: We've identified 3 warning signs with Senton EnergyLtd (at least 1 which is significant) , and understanding them would certainly be useful.

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.