Returns Are Gaining Momentum At Carimin Petroleum Berhad (KLSE:CARIMIN)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Carimin Petroleum Berhad (KLSE:CARIMIN) and its trend of ROCE, we really liked what we saw.

What Is 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)

0.08 = RM14m ÷ (RM261m - RM84m) (Based on the trailing twelve months to March 2022).

So, Carimin Petroleum Berhad has an ROCE of 8.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.6%.

Check out 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 Does the ROCE Trend For Carimin Petroleum Berhad Tell Us?

We're delighted to see that Carimin Petroleum Berhad is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. 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. The current liabilities has increased to 32% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

In Conclusion...

In summary, it's great to see that Carimin Petroleum Berhad has been able to turn things around and earn higher returns on lower amounts of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.

If you want to continue researching Carimin Petroleum Berhad, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.