Yahoo Finance Pine Cliff Energy (TSE:PNE) Is Very Good At Capital Allocation
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in Pine Cliff Energy's (TSE:PNE) returns on capital, so let's have a look.
Understanding 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 Pine Cliff Energy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.33 = CA$112m ÷ (CA$375m - CA$38m) (Based on the trailing twelve months to December 2022).
Therefore, Pine Cliff Energy has an ROCE of 33%. That's a fantastic return and not only that, it outpaces the average of 20% earned by companies in a similar industry.
Check out our latest analysis for Pine Cliff Energy
Above you can see how the current ROCE for Pine Cliff Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Pine Cliff Energy.
The Trend Of ROCE
We're delighted to see that Pine Cliff Energy is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 33% on its capital. While returns have increased, the amount of capital employed by Pine Cliff 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. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
In Conclusion...
As discussed above, Pine Cliff Energy appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 363% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Pine Cliff Energy can keep these trends up, it could have a bright future ahead.
Like most companies, Pine Cliff Energy does come with some risks, and we've found 2 warning signs that you should be aware of.
Pine Cliff 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.
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