South West Pinnacle Exploration (NSE:SOUTHWEST) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think South West Pinnacle Exploration (NSE:SOUTHWEST) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on South West Pinnacle Exploration is:

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

0.11 = ₹165m ÷ (₹2.3b - ₹778m) (Based on the trailing twelve months to September 2024).

Therefore, South West Pinnacle Exploration has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Metals and Mining industry average it falls behind.

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'd like to look at how South West Pinnacle Exploration has performed in the past in other metrics, you can view this free graph of South West Pinnacle Exploration's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of South West Pinnacle Exploration's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 14%, but since then they've fallen to 11%. 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.

In Conclusion...

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. And long term investors must be optimistic going forward because the stock has returned a huge 731% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One final note, you should learn about the 2 warning signs we've spotted with South West Pinnacle Exploration (including 1 which shouldn't be ignored) .

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. 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.