Returns On Capital Are Showing Encouraging Signs At Ratio Energies - Limited Partnership (TLV:RATI)

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Ratio Energies - Limited Partnership's (TLV:RATI) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Ratio Energies - Limited Partnership, this is the formula:

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

0.19 = US$218m ÷ (US$1.2b - US$56m) (Based on the trailing twelve months to June 2024).

Thus, Ratio Energies - Limited Partnership has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 11% it's much better.

Check out our latest analysis for Ratio Energies - Limited Partnership

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ratio Energies - Limited Partnership's ROCE against it's prior returns. If you're interested in investigating Ratio Energies - Limited Partnership's past further, check out this free graph covering Ratio Energies - Limited Partnership's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Ratio Energies - Limited Partnership has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 19% on its capital. Not only that, but the company is utilizing 24% 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.

Our Take On Ratio Energies - Limited Partnership's ROCE

Long story short, we're delighted to see that Ratio Energies - Limited Partnership's reinvestment activities have paid off and the company is now profitable. And with a respectable 56% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 2 warning signs facing Ratio Energies - Limited Partnership that you might find interesting.

While Ratio Energies - Limited Partnership 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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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.