Petro Welt Technologies' (ETR:O2C) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. In light of that, when we looked at Petro Welt Technologies (ETR:O2C) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Petro Welt Technologies, this is the formula:

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

0.049 = €15m ÷ (€364m - €53m) (Based on the trailing twelve months to December 2020).

Therefore, Petro Welt Technologies has an ROCE of 4.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.9%.

Check out our latest analysis for Petro Welt Technologies

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

How Are Returns Trending?

On the surface, the trend of ROCE at Petro Welt Technologies doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.9% from 15% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Petro Welt Technologies' ROCE

In summary, we're somewhat concerned by Petro Welt Technologies' diminishing returns on increasing amounts of capital. Unsurprisingly then, the stock has dived 71% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 4 warning signs for Petro Welt Technologies (2 are significant) you should be aware of.

While Petro Welt Technologies 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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