Will The ROCE Trend At Photon Energy (WSE:PEN) Continue?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 when we looked at Photon Energy (WSE:PEN) and its trend of ROCE, we really liked what we saw.

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 Photon Energy:

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

0.01 = €1.4m ÷ (€149m - €13m) (Based on the trailing twelve months to September 2020).

Therefore, Photon Energy has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Electrical industry average of 10%.

Check out our latest analysis for Photon Energy

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 Photon Energy, check out these free graphs here.

What Can We Tell From Photon Energy's ROCE Trend?

We're delighted to see that Photon Energy is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 1.0% on its capital. In addition to that, Photon Energy is employing 64% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

What We Can Learn From Photon Energy's ROCE

To the delight of most shareholders, Photon Energy has now broken into profitability. 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 Photon Energy can keep these trends up, it could have a bright future ahead.

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

While Photon Energy 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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