Stock Analysis

The Return Trends At Ratio Energies - Limited Partnership (TLV:RATI) Look Promising

TASE:RATI
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Ratio Energies - Limited Partnership (TLV:RATI) looks quite promising in regards to its trends of return on capital.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.18 = US$177m ÷ (US$1.2b - US$172m) (Based on the trailing twelve months to March 2022).

So, Ratio Energies - Limited Partnership has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 10% generated by the Oil and Gas industry.

View our latest analysis for Ratio Energies - Limited Partnership

roce
TASE:RATI Return on Capital Employed June 21st 2022

In the above chart we have measured Ratio Energies - Limited Partnership's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

We're delighted to see that Ratio Energies - Limited Partnership is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 18% on its capital. Not only that, but the company is utilizing 129% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 15% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line

To the delight of most shareholders, Ratio Energies - Limited Partnership has now broken into profitability. Since the stock has only returned 5.7% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Ratio Energies - Limited Partnership does have some risks though, and we've spotted 1 warning sign for Ratio Energies - Limited Partnership that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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

Find out whether Ratio Energies - Limited Partnership 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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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.