Returns On Capital At Supergas Energy (TLV:SPGE) Paint A Concerning Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Supergas Energy (TLV:SPGE), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Supergas Energy:

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

0.042 = ₪60m ÷ (₪1.7b - ₪308m) (Based on the trailing twelve months to June 2022).

So, Supergas Energy has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 15%.

Check out our latest analysis for Supergas Energy

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

What Can We Tell From Supergas Energy's ROCE Trend?

When we looked at the ROCE trend at Supergas Energy, we didn't gain much confidence. Around three years ago the returns on capital were 11%, but since then they've fallen to 4.2%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Supergas Energy. These growth trends haven't led to growth returns though, since the stock has fallen 14% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Supergas Energy (of which 3 shouldn't be ignored!) that you should know about.

While Supergas 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.