Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Carimin Petroleum Berhad (KLSE:CARIMIN) 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. Analysts use this formula to calculate it for Carimin Petroleum Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = RM29m ÷ (RM276m - RM79m) (Based on the trailing twelve months to June 2023).
Therefore, Carimin Petroleum Berhad has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 10% generated by the Energy Services industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Carimin Petroleum Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Carimin Petroleum Berhad, check out these free graphs here.
What Can We Tell From Carimin Petroleum Berhad's ROCE Trend?
Shareholders will be relieved that Carimin Petroleum Berhad has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 15% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
What We Can Learn From Carimin Petroleum Berhad's ROCE
To bring it all together, Carimin Petroleum Berhad has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 194% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Carimin Petroleum Berhad can keep these trends up, it could have a bright future ahead.
One more thing to note, we've identified 2 warning signs with Carimin Petroleum Berhad and understanding these should be part of your investment process.
While Carimin Petroleum Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.