Returns On Capital At South West Pinnacle Exploration (NSE:SOUTHWEST) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after investigating South West Pinnacle Exploration (NSE:SOUTHWEST), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for South West Pinnacle Exploration:

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

0.14 = ₹149m ÷ (₹1.7b - ₹636m) (Based on the trailing twelve months to December 2020).

Therefore, South West Pinnacle Exploration has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 11% it's much better.

Check out our latest analysis for South West Pinnacle Exploration

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

So How Is South West Pinnacle Exploration's ROCE Trending?

In terms of South West Pinnacle Exploration's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 48% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, South West Pinnacle Exploration has decreased its current liabilities to 38% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

While returns have fallen for South West Pinnacle Exploration in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for South West Pinnacle Exploration (of which 1 is potentially serious!) that you should know about.

While South West Pinnacle Exploration 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. 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.
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