Returns On Capital Are Showing Encouraging Signs At Petrolia (OB:PSE)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 when we looked at Petrolia (OB:PSE) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Petrolia, this is the formula:

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

0.11 = US$5.2m ÷ (US$66m - US$17m) (Based on the trailing twelve months to June 2022).

Therefore, Petrolia has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Energy Services industry average of 5.3% it's much better.

View our latest analysis for Petrolia

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

So How Is Petrolia's ROCE Trending?

Petrolia has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 11% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. 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. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Key Takeaway

To bring it all together, Petrolia has done well to increase the returns it's generating from its capital employed. And with a respectable 95% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing Petrolia, we've discovered 1 warning sign that you should be aware of.

While Petrolia isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.