The Trend Of High Returns At Serica Energy (LON:SQZ) Has Us Very Interested

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Serica Energy (LON:SQZ) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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 Serica Energy is:

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

0.26 = US$336m ÷ (US$1.6b - US$323m) (Based on the trailing twelve months to June 2024).

Therefore, Serica Energy has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 7.6% earned by companies in a similar industry.

View our latest analysis for Serica Energy

Above you can see how the current ROCE for Serica Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Serica Energy for free.

So How Is Serica Energy's ROCE Trending?

We like the trends that we're seeing from Serica Energy. The data shows that returns on capital have increased substantially over the last five years to 26%. The amount of capital employed has increased too, by 172%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On Serica Energy's ROCE

To sum it up, Serica Energy has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 52% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Serica Energy can keep these trends up, it could have a bright future ahead.

If you want to continue researching Serica Energy, you might be interested to know about the 2 warning signs that our analysis has discovered.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.