Selan Exploration Technology (NSE:SELAN) Has Some Difficulty Using Its Capital Effectively

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Selan Exploration Technology (NSE:SELAN), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Selan Exploration Technology:

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

0.056 = ₹240m ÷ (₹4.5b - ₹218m) (Based on the trailing twelve months to December 2023).

Therefore, Selan Exploration Technology has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 15%.

View our latest analysis for Selan Exploration Technology

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Selan Exploration Technology's past further, check out this free graph covering Selan Exploration Technology's past earnings, revenue and cash flow.

So How Is Selan Exploration Technology's ROCE Trending?

We are a bit worried about the trend of returns on capital at Selan Exploration Technology. To be more specific, the ROCE was 12% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Selan Exploration Technology becoming one if things continue as they have.

Our Take On Selan Exploration Technology's ROCE

In summary, it's unfortunate that Selan Exploration Technology is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 213%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about Selan Exploration Technology, we've spotted 3 warning signs, and 1 of them is concerning.

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.

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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.