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Returns On Capital - An Important Metric For BNK Petroleum (TSE:BKX)

Simply Wall St
·3 min read

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at BNK Petroleum (TSE:BKX) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on BNK Petroleum is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.067 = US$5.3m ÷ (US$87m - US$7.0m) (Based on the trailing twelve months to June 2020).

Thus, BNK Petroleum has an ROCE of 6.7%. In absolute terms, that's a low return but it's around the Oil and Gas industry average of 5.8%.

View our latest analysis for BNK Petroleum

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Historical performance is a great place to start when researching a stock so above you can see the gauge for BNK Petroleum's ROCE against it's prior returns. If you'd like to look at how BNK Petroleum has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From BNK Petroleum's ROCE Trend?

Like most people, we're pleased that BNK Petroleum is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 6.7% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 47%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

The Key Takeaway

In a nutshell, we're pleased to see that BNK Petroleum has been able to generate higher returns from less capital. And since the stock has dived 88% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

If you'd like to know more about BNK Petroleum, we've spotted 3 warning signs, and 2 of them shouldn't be ignored.

While BNK Petroleum 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. 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@simplywallst.com.