Returns On Capital - An Important Metric For FAR-EASTERN ENERGY (MCX:DVEC)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in FAR-EASTERN ENERGY's (MCX:DVEC) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for FAR-EASTERN ENERGY:

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

0.071 = ₽3.9b ÷ (₽98b - ₽42b) (Based on the trailing twelve months to June 2020).

Thus, FAR-EASTERN ENERGY has an ROCE of 7.1%. In absolute terms, that's a low return but it's around the Electric Utilities industry average of 7.7%.

View our latest analysis for FAR-EASTERN ENERGY

Historical performance is a great place to start when researching a stock so above you can see the gauge for FAR-EASTERN ENERGY's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of FAR-EASTERN ENERGY, check out these free graphs here.

So How Is FAR-EASTERN ENERGY's ROCE Trending?

FAR-EASTERN ENERGY has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 7.1% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, FAR-EASTERN ENERGY is utilizing 174% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 43%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

Our Take On FAR-EASTERN ENERGY's ROCE

Overall, FAR-EASTERN ENERGY gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has only returned 31% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing, we've spotted 2 warning signs facing FAR-EASTERN ENERGY that you might find interesting.

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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This article by Simply Wall St is general in nature. 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.
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