Returns On Capital Are Showing Encouraging Signs At Great Eastern Energy (LON:GEEC)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. 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 Great Eastern Energy's (LON:GEEC) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for Great Eastern Energy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.067 = US$9.4m ÷ (US$152m - US$12m) (Based on the trailing twelve months to September 2021).
Thus, Great Eastern Energy has an ROCE of 6.7%. On its own, that's a low figure but it's around the 5.7% average generated by the Oil and Gas industry.
See our latest analysis for Great Eastern Energy
Historical performance is a great place to start when researching a stock so above you can see the gauge for Great Eastern Energy's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Great Eastern Energy, check out these free graphs here.
What Can We Tell From Great Eastern Energy's ROCE Trend?
Great Eastern Energy has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 79% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
In Conclusion...
In summary, we're delighted to see that Great Eastern Energy has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 32% over the last five years, there might be an opportunity here. 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 Great Eastern Energy (1 is concerning) you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
