There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. With that in mind, we've noticed some promising trends at Bonanza Creek Energy (NYSE:BCEI) so let's look a bit deeper.
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. The formula for this calculation on Bonanza Creek Energy is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.06 = US$67m ÷ (US$1.2b - US$74m) (Based on the trailing twelve months to December 2020).
Thus, Bonanza Creek Energy has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 7.9%.
In the above chart we have measured Bonanza Creek Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Bonanza Creek Energy here for free.
What Does the ROCE Trend For Bonanza Creek Energy Tell Us?
Shareholders will be relieved that Bonanza Creek Energy has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 6.0%, which is always encouraging. While returns have increased, the amount of capital employed by Bonanza Creek Energy has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
What We Can Learn From Bonanza Creek Energy's ROCE
In summary, we're delighted to see that Bonanza Creek Energy has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has dived 88% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
One more thing to note, we've identified 4 warning signs with Bonanza Creek Energy and understanding them should be part of your investment process.
While Bonanza Creek 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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