Under The Bonnet, Hemisphere Energy's (CVE:HME) Returns Look Impressive
What are the early trends we should look for to identify a stock that could 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of Hemisphere Energy (CVE:HME) we really liked what we saw.
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. 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)
0.39 = CA$31m ÷ (CA$95m - CA$14m) (Based on the trailing twelve months to September 2023).
Thus, Hemisphere Energy has an ROCE of 39%. That's a fantastic return and not only that, it outpaces the average of 8.7% earned by companies in a similar industry.
View our latest analysis for Hemisphere Energy
Above you can see how the current ROCE for Hemisphere Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hemisphere Energy for free.
How Are Returns Trending?
The fact that Hemisphere Energy is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 39% on its capital. 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 indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
What We Can Learn From Hemisphere Energy's ROCE
Long story short, we're delighted to see that Hemisphere Energy's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 1,511% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.
One final note, you should learn about the 2 warning signs we've spotted with Hemisphere Energy (including 1 which shouldn't be ignored) .
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.
