If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Pulse Oil's (CVE:PUL) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for Pulse Oil:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.065 = CA$1.9m ÷ (CA$31m - CA$1.6m) (Based on the trailing twelve months to June 2022).
Therefore, Pulse Oil has an ROCE of 6.5%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 18%.
See our latest analysis for Pulse Oil
Historical performance is a great place to start when researching a stock so above you can see the gauge for Pulse Oil's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Pulse Oil, check out these free graphs here.
How Are Returns Trending?
We're delighted to see that Pulse Oil is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 6.5% which is a sight for sore eyes. Not only that, but the company is utilizing 357% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
What We Can Learn From Pulse Oil's ROCE
To the delight of most shareholders, Pulse Oil has now broken into profitability. Given the stock has declined 53% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
On a final note, we found 5 warning signs for Pulse Oil (2 shouldn't be ignored) you should be aware of.
While Pulse Oil isn't earning the highest return, check out this free list of companies that are 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.
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