Epsilon Energy (NASDAQ:EPSN) Shareholders Will Want The ROCE Trajectory To Continue

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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, Epsilon Energy (NASDAQ:EPSN) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

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 Epsilon Energy:

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

0.17 = US$16m ÷ (US$99m - US$7.5m) (Based on the trailing twelve months to December 2021).

So, Epsilon Energy has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 10% it's much better.

Check out our latest analysis for Epsilon Energy

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

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

We're delighted to see that Epsilon Energy is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 17% on its capital. And unsurprisingly, like most companies trying to break into the black, Epsilon Energy is utilizing 37% more capital than it was five years ago. 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.

One more thing to note, Epsilon Energy has decreased current liabilities to 7.6% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line

Long story short, we're delighted to see that Epsilon Energy's reinvestment activities have paid off and the company is now profitable. 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. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 2 warning signs with Epsilon Energy and understanding them should be part of your investment process.

While Epsilon Energy may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.