If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of Centrica (LON:CNA) we really liked what we saw.

Understanding 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 Centrica, this is the formula:

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

0.33 = UK£3.2b ÷ (UK£17b - UK£7.1b) (Based on the trailing twelve months to June 2020).

So, Centrica has an ROCE of 33%. That's a fantastic return and not only that, it outpaces the average of 4.8% earned by companies in a similar industry.

View our latest analysis for Centrica

Above you can see how the current ROCE for Centrica compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Centrica.

What Does the ROCE Trend For Centrica Tell Us?

Centrica has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 233% over the trailing five years. The company is now earning UK£0.3 per dollar of capital employed. In regards to capital employed, Centrica appears to been achieving more with less, since the business is using 32% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

Another thing to note, Centrica has a high ratio of current liabilities to total assets of 43%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Centrica's ROCE

In the end, Centrica has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has dived 73% 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.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

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.

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.

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