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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. And in light of that, the trends we're seeing at Hemisphere Energy's (CVE:HME) look very promising so lets take a look.
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 Hemisphere Energy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.43 = CA$32m ÷ (CA$84m - CA$8.7m) (Based on the trailing twelve months to June 2023).
Thus, Hemisphere Energy has an ROCE of 43%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.
View our latest analysis for Hemisphere Energy
In the above chart we have measured Hemisphere Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hemisphere Energy here for free.
What Can We Tell From Hemisphere Energy's ROCE Trend?
The fact that Hemisphere Energy is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 43% on its capital. Not only that, but the company is utilizing 62% more capital than before, but that's to be expected from a company trying to break into profitability. 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.
The Key Takeaway
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 527% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Hemisphere Energy does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those can't be ignored...