Does Great Eastern Energy's (LON:GEEC) Returns On Capital Reflect Well On The Business?

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Great Eastern Energy (LON:GEEC) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Great Eastern Energy is:

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

0.078 = US$11m ÷ (US$160m - US$15m) (Based on the trailing twelve months to September 2020).

Therefore, Great Eastern Energy has an ROCE of 7.8%. On its own that's a low return, but compared to the average of 4.4% generated by the Oil and Gas industry, it's much better.

View our latest analysis for Great Eastern Energy

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, revenue and cash flow of Great Eastern Energy, check out these free graphs here.

The Trend Of ROCE

There is reason to be cautious about Great Eastern Energy, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 12% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Great Eastern Energy to turn into a multi-bagger.

What We Can Learn From Great Eastern Energy's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 64% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 4 warning signs with Great Eastern Energy (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

While Great Eastern Energy may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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