i3 Energy (LON:I3E) Is Experiencing Growth In Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in i3 Energy's (LON:I3E) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on i3 Energy is:

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

0.18 = UK£52m ÷ (UK£324m - UK£44m) (Based on the trailing twelve months to June 2023).

So, i3 Energy has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 10% it's much better.

Check out our latest analysis for i3 Energy

In the above chart we have measured i3 Energy's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for i3 Energy .

So How Is i3 Energy's ROCE Trending?

We're delighted to see that i3 Energy is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 18% which is a sight for sore eyes. Not only that, but the company is utilizing 6,329% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line On i3 Energy's ROCE

To the delight of most shareholders, i3 Energy has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 65% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

i3 Energy does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.