Carimin Petroleum Berhad (KLSE:CARIMIN) Shareholders Will Want The ROCE Trajectory To Continue

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Carimin Petroleum Berhad (KLSE:CARIMIN) so let's look a bit deeper.

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. The formula for this calculation on Carimin Petroleum Berhad is:

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

0.079 = RM15m ÷ (RM295m - RM111m) (Based on the trailing twelve months to December 2021).

Thus, Carimin Petroleum Berhad has an ROCE of 7.9%. In absolute terms, that's a low return but it's around the Energy Services industry average of 9.3%.

See our latest analysis for Carimin Petroleum Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Carimin Petroleum Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Carimin Petroleum Berhad, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Carimin Petroleum Berhad is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 7.9% on their capital employed. In regards to capital employed, Carimin Petroleum Berhad is using 22% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Carimin Petroleum Berhad could be selling under-performing assets since the ROCE is improving.

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. Effectively this means that suppliers or short-term creditors are now funding 38% of the business, which is more than it was five years ago. 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 On Carimin Petroleum Berhad's ROCE

In the end, Carimin Petroleum Berhad has proven it's capital allocation skills are good with those higher returns from less amount of capital. And a remarkable 149% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Carimin Petroleum Berhad can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Carimin Petroleum Berhad (of which 1 shouldn't be ignored!) that you should know about.

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.