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What trends should we look for it we want to identify stocks that can 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Pine Cliff Energy (TSE:PNE) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)
0.066 = CA$22m ÷ (CA$379m - CA$45m) (Based on the trailing twelve months to December 2021).
Thus, Pine Cliff Energy has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 9.4%.
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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
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. The company was generating losses five years ago, but now it's turned around, earning 6.6% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 24%. Pine Cliff Energy could be selling under-performing assets since the ROCE is improving.
From what we've seen above, Pine Cliff Energy has managed to increase it's returns on capital all the while reducing it's capital base. Considering the stock has delivered 24% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
If you want to know some of the risks facing Pine Cliff Energy we've found 3 warning signs (1 is concerning!) that you should be aware of before investing here.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.