Yahoo Finance Canacol Energy (TSE:CNE) Shareholders Will Want The ROCE Trajectory To Continue
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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Canacol Energy (TSE:CNE) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Canacol Energy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$102m ÷ (US$741m - US$103m) (Based on the trailing twelve months to September 2021).
Thus, Canacol Energy has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 6.6% generated by the Oil and Gas industry.
See our latest analysis for Canacol Energy
In the above chart we have measured Canacol Energy's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Canacol Energy's ROCE Trend?
Canacol Energy has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 16% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Canacol Energy has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
The Bottom Line On Canacol Energy's ROCE
To sum it up, Canacol Energy is collecting higher returns from the same amount of capital, and that's impressive. Astute investors may have an opportunity here because the stock has declined 21% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you want to continue researching Canacol Energy, you might be interested to know about the 3 warning signs that our analysis has discovered.
While Canacol 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.
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.
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