Will the Promising Trends At Petrolia (OB:PSE) Continue?

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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, Petrolia (OB:PSE) 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. Analysts use this formula to calculate it for Petrolia:

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

0.10 = US$5.3m ÷ (US$67m - US$17m) (Based on the trailing twelve months to June 2020).

Thus, Petrolia has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Energy Services industry average of 7.3% it's much better.

See 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're interested in investigating Petrolia's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Petrolia's ROCE Trend?

It's great to see that Petrolia has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 10% which is no doubt a relief for some early shareholders. In regards to capital employed, Petrolia is using 54% 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. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

The Bottom Line 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 60% 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. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Petrolia does have some risks though, and we've spotted 2 warning signs for Petrolia that you might be interested in.

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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