If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 the ROCE trend of PrimeEnergy Resources (NASDAQ:PNRG) we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for PrimeEnergy Resources:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.22 = US$56m ÷ (US$335m – US$81m) (Based on the trailing twelve months to June 2024).
So, PrimeEnergy Resources has an ROCE of 22%. In absolute terms that’s a great return and it’s even better than the Oil and Gas industry average of 12%.
See our latest analysis for PrimeEnergy Resources
Historical performance is a great place to start when researching a stock so above you can see the gauge for PrimeEnergy Resources’ ROCE against it’s prior returns. If you’d like to look at how PrimeEnergy Resources has performed in the past in other metrics, you can view this free graph of PrimeEnergy Resources’ past earnings, revenue and cash flow.
What Can We Tell From PrimeEnergy Resources’ ROCE Trend?
PrimeEnergy Resources’ ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 163% over the last five years. So it’s likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn’t changed considerably. On that front, things are looking good so it’s worth exploring what management has said about growth plans going forward.
For the record though, there was a noticeable increase in the company’s current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 24% of the business, which is more than it was five years ago. 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.
What We Can Learn From PrimeEnergy Resources’ ROCE
In summary, we’re delighted to see that PrimeEnergy Resources has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 16% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
Since virtually every company faces some risks, it’s worth knowing what they are, and we’ve spotted 2 warning signs for PrimeEnergy Resources (of which 1 is potentially serious!) that you should know about.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.
