The Return Trends At Petrolia (OB:PSE) Look Promising

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So on that note, Petrolia (OB:PSE) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Petrolia:

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

0.014 = US$779k ÷ (US$71m - US$15m) (Based on the trailing twelve months to December 2020).

Thus, Petrolia has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 5.5%.

Check out our latest analysis for Petrolia

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Petrolia, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Like most people, we're pleased that Petrolia is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 1.4% on their capital employed. Additionally, the business is utilizing 27% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.

Our Take On Petrolia's ROCE

In the end, Petrolia has proven it's capital allocation skills are good with those higher returns from less amount of capital. And with a respectable 72% 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. In light of that, we think it's worth looking further into this stock because if Petrolia can keep these trends up, it could have a bright future ahead.

Like most companies, Petrolia does come with some risks, and we've found 2 warning signs that you should be aware of.

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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