Epsilon Energy (NASDAQ:EPSN) Knows How To Allocate Capital Effectively
To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Epsilon Energy's (NASDAQ:EPSN) 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 Epsilon Energy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.36 = US$43m ÷ (US$125m - US$5.7m) (Based on the trailing twelve months to March 2023).
Therefore, Epsilon Energy has an ROCE of 36%. That's a fantastic return and not only that, it outpaces the average of 20% earned by companies in a similar industry.
Check out our latest analysis for Epsilon Energy
Historical performance is a great place to start when researching a stock so above you can see the gauge for Epsilon Energy's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Epsilon Energy, check out these free graphs here.
What Can We Tell From Epsilon Energy's ROCE Trend?
Epsilon Energy is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 432% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
Our Take On Epsilon Energy's ROCE
As discussed above, Epsilon Energy appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with a respectable 71% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.
Epsilon Energy does have some risks though, and we've spotted 1 warning sign for Epsilon Energy that you might be interested in.
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.
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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.
