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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Canacol Energy (TSE:CNE) looks decent, right now, so lets see what the trend of returns can tell us.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Canacol Energy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$137m ÷ (US$1.2b - US$143m) (Based on the trailing twelve months to March 2024).
Thus, Canacol Energy has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 8.5% it's much better.
View our latest analysis for Canacol Energy
Above you can see how the current ROCE for Canacol Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Canacol Energy .
How Are Returns Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 67% more capital into its operations. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line On Canacol Energy's ROCE
To sum it up, Canacol Energy has simply been reinvesting capital steadily, at those decent rates of return. Despite these impressive fundamentals, the stock has collapsed 75% over the last five years, so there is likely other factors affecting the company's future prospects. In any case, we like the underlying trends and would look further into this stock.
If you want to know some of the risks facing Canacol Energy we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.