Yahoo Finance Perpetual Energy (TSE:PMT) Is Achieving High Returns On Its Capital
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 when we looked at the ROCE trend of Perpetual Energy (TSE:PMT) we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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 Perpetual Energy is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = CA$39m ÷ (CA$218m - CA$22m) (Based on the trailing twelve months to December 2022).
Therefore, Perpetual Energy has an ROCE of 20%. On its own, that's a very good return and it's on par with the returns earned by companies in a similar industry.
See our latest analysis for Perpetual Energy
In the above chart we have measured Perpetual 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.
How Are Returns Trending?
Perpetual Energy has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 2,771%. The company is now earning CA$0.2 per dollar of capital employed. In regards to capital employed, Perpetual Energy appears to been achieving more with less, since the business is using 35% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
What We Can Learn From Perpetual Energy's ROCE
From what we've seen above, Perpetual Energy has managed to increase it's returns on capital all the while reducing it's capital base. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
If you want to know some of the risks facing Perpetual Energy we've found 6 warning signs (2 are potentially serious!) that you should be aware of before investing here.
Perpetual 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
