The Return Trends At Carimin Petroleum Berhad (KLSE:CARIMIN) Look Promising

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Carimin Petroleum Berhad (KLSE:CARIMIN) looks quite promising in regards to its trends of return on capital.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Carimin Petroleum Berhad, this is the formula:

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

0.11 = RM21m ÷ (RM302m - RM117m) (Based on the trailing twelve months to December 2022).

Therefore, Carimin Petroleum Berhad has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Energy Services industry average of 7.8% it's much better.

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

Shareholders will be relieved that Carimin Petroleum Berhad has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 11% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

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 39% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. 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

To bring it all together, Carimin Petroleum Berhad has done well to increase the returns it's generating from its capital employed. And a remarkable 108% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 1 warning sign with Carimin Petroleum Berhad and understanding this should be part of your investment process.

While Carimin Petroleum Berhad 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.