Under The Bonnet, Epsilon Energy's (NASDAQ:EPSN) Returns Look Impressive

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Epsilon Energy (NASDAQ:EPSN) looks great, so lets see what the trend can tell us.

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. To calculate this metric for Epsilon Energy, this is the formula:

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

0.26 = US$31m ÷ (US$121m - US$4.4m) (Based on the trailing twelve months to June 2023).

Therefore, Epsilon Energy has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 20%.

Check out our latest analysis for Epsilon 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're interested in investigating Epsilon Energy's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Epsilon Energy's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 657% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line On Epsilon Energy's ROCE

In summary, we're delighted to see that Epsilon Energy has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 52% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Epsilon Energy can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for Epsilon Energy that we think you should be aware of.

Epsilon Energy is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.