Returns On Capital Are Showing Encouraging Signs At Amplify Energy (NYSE:AMPY)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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, Amplify Energy (NYSE:AMPY) 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. To calculate this metric for Amplify Energy, this is the formula:

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

0.044 = US$12m ÷ (US$457m - US$188m) (Based on the trailing twelve months to June 2022).

Therefore, Amplify Energy has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 13%.

See our latest analysis for Amplify Energy

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

How Are Returns Trending?

It's great to see that Amplify Energy has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 4.4% on their capital employed. In regards to capital employed, Amplify Energy is using 70% 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.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 41% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Amplify Energy's ROCE

From what we've seen above, Amplify Energy has managed to increase it's returns on capital all the while reducing it's capital base. And with a respectable 24% awarded to those who held the stock over the last three years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Amplify Energy can keep these trends up, it could have a bright future ahead.

If you want to know some of the risks facing Amplify Energy we've found 3 warning signs (2 are potentially serious!) that you should be aware of before investing here.

While Amplify 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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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.