The Returns On Capital At Great Eastern Energy (LON:GEEC) Don't Inspire Confidence

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Great Eastern Energy (LON:GEEC), we weren't too upbeat about how things were going.

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. Analysts use this formula to calculate it for Great Eastern Energy:

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

0.042 = US$5.2m ÷ (US$134m - US$10m) (Based on the trailing twelve months to September 2022).

Thus, Great Eastern Energy has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 12%.

Check out our latest analysis for Great Eastern Energy

Historical performance is a great place to start when researching a stock so above you can see the gauge for Great Eastern Energy's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Great Eastern Energy, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We are a bit anxious about the trends of ROCE at Great Eastern Energy. The company used to generate 7.4% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 25% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

What We Can Learn From Great Eastern Energy's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. This could explain why the stock has sunk a total of 94% in the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Great Eastern Energy, we've spotted 4 warning signs, and 3 of them don't sit too well with us.

While Great Eastern Energy 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.