Hemisphere Energy's (CVE:HME) Returns On Capital Are Heading Higher
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Hemisphere Energy's (CVE:HME) returns on capital, so let's have a look.
What is 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 Hemisphere Energy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.096 = CA$4.3m ÷ (CA$56m - CA$11m) (Based on the trailing twelve months to June 2021).
So, Hemisphere Energy has an ROCE of 9.6%. On its own that's a low return, but compared to the average of 5.5% generated by the Oil and Gas industry, it's much better.
View our latest analysis for Hemisphere Energy
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hemisphere Energy's ROCE against it's prior returns. If you're interested in investigating Hemisphere Energy's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Hemisphere Energy has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 9.6% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Hemisphere Energy is utilizing 57% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
Our Take On Hemisphere Energy's ROCE
In summary, it's great to see that Hemisphere Energy has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 429% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Hemisphere Energy does have some risks though, and we've spotted 2 warning signs for Hemisphere Energy that you might be interested in.
While Hemisphere Energy isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
