Returns On Capital At Petrolina (Holdings) (CSE:PHL) Have Hit The Brakes

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. However, after briefly looking over the numbers, we don't think Petrolina (Holdings) (CSE:PHL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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Understanding 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. To calculate this metric for Petrolina (Holdings), this is the formula:

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

0.025 = €5.9m ÷ (€369m - €136m) (Based on the trailing twelve months to December 2024).

So, Petrolina (Holdings) has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 9.0%.

View our latest analysis for Petrolina (Holdings)

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Petrolina (Holdings).

What Does the ROCE Trend For Petrolina (Holdings) Tell Us?

The returns on capital haven't changed much for Petrolina (Holdings) in recent years. The company has consistently earned 2.5% for the last five years, and the capital employed within the business has risen 27% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On Petrolina (Holdings)'s ROCE

In conclusion, Petrolina (Holdings) has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 65% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Petrolina (Holdings) does have some risks though, and we've spotted 2 warning signs for Petrolina (Holdings) that you might be interested in.

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.