Yahoo Finance Why We Like The Returns At Centaurus Energy (CVE:CTA)
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So when we looked at the ROCE trend of Centaurus Energy (CVE:CTA) we really liked what we saw.
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 Centaurus Energy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.38 = US$4.1m ÷ (US$16m - US$4.9m) (Based on the trailing twelve months to March 2024).
So, Centaurus Energy has an ROCE of 38%. That's a fantastic return and not only that, it outpaces the average of 8.8% earned by companies in a similar industry.
Check out our latest analysis for Centaurus Energy
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Centaurus Energy.
What Does the ROCE Trend For Centaurus Energy Tell Us?
We're delighted to see that Centaurus 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 38% which is no doubt a relief for some early shareholders. In regards to capital employed, Centaurus Energy is using 79% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Centaurus Energy could be selling under-performing assets since the ROCE is improving.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 31% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
Our Take On Centaurus Energy's ROCE
From what we've seen above, Centaurus Energy has managed to increase it's returns on capital all the while reducing it's capital base. Although the company may be facing some issues elsewhere since the stock has plunged 97% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
If you want to continue researching Centaurus Energy, you might be interested to know about the 3 warning signs that our analysis has discovered.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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.
