Stock Analysis

Returns Are Gaining Momentum At Genel Energy (LON:GENL)

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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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 Genel Energy (LON:GENL) and its trend of ROCE, we really liked what we saw.

What is 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. The formula for this calculation on Genel Energy is:

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

0.041 = US$57m ÷ (US$1.5b - US$101m) (Based on the trailing twelve months to June 2021).

Thus, Genel Energy has an ROCE of 4.1%. Even though it's in line with the industry average of 3.8%, it's still a low return by itself.

Check out our latest analysis for Genel Energy

LSE:GENL Return on Capital Employed January 21st 2022

Above you can see how the current ROCE for Genel 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 Genel Energy here for free.

How Are Returns Trending?

Like most people, we're pleased that Genel Energy is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 4.1% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 59%. Genel Energy could be selling under-performing assets since the ROCE is improving.

The Bottom Line

In summary, it's great to see that Genel Energy has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has returned a staggering 180% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Genel Energy (of which 1 is concerning!) that you should know about.

While Genel 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.

Valuation is complex, but we're helping make it simple.

Find out whether Genel Energy is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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