Returns On Capital Signal Tricky Times Ahead For Petrolina (Holdings) (CSE:PHL)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Petrolina (Holdings) (CSE:PHL), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Petrolina (Holdings) is:

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

0.024 = €5.7m ÷ (€372m - €131m) (Based on the trailing twelve months to June 2023).

So, Petrolina (Holdings) has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 11%.

See our latest analysis for Petrolina (Holdings)

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

So How Is Petrolina (Holdings)'s ROCE Trending?

On the surface, the trend of ROCE at Petrolina (Holdings) doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.4% from 3.6% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Petrolina (Holdings)'s reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last five years has been flat. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to know some of the risks facing Petrolina (Holdings) we've found 4 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.

While Petrolina (Holdings) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.