The Trend Of High Returns At Cardinal Energy (TSE:CJ) Has Us Very Interested
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Cardinal Energy (TSE:CJ) we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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 Cardinal Energy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.29 = CA$301m ÷ (CA$1.2b - CA$109m) (Based on the trailing twelve months to December 2022).
Therefore, Cardinal Energy has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 21%.
Check out our latest analysis for Cardinal Energy
In the above chart we have measured Cardinal Energy's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
We're delighted to see that Cardinal Energy is reaping rewards from its investments and has now broken into profitability. The company now earns 29% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Cardinal Energy has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. 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 Cardinal Energy's ROCE
In summary, we're delighted to see that Cardinal Energy has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 101% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing, we've spotted 3 warning signs facing Cardinal Energy that you might find interesting.
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.
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.
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