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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Canacol Energy's (TSE:CNE) ROCE trend, we were pretty happy with what we saw.
What Is 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. The formula for this calculation on Canacol Energy is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$169m ÷ (US$1.2b - US$114m) (Based on the trailing twelve months to September 2024).
Thus, Canacol Energy has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.4% generated by the Oil and Gas industry.
View our latest analysis for Canacol Energy
In the above chart we have measured Canacol 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 analyst report for Canacol Energy .
What Can We Tell From Canacol Energy's ROCE Trend?
While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 15% and the business has deployed 70% more capital into its operations. 15% is a pretty standard return, and it provides some comfort knowing that Canacol Energy has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Bottom Line
In the end, Canacol Energy has proven its ability to adequately reinvest capital at good rates of return. What's surprising though is that the stock has collapsed 77% over the last five years, so there might be other areas of the business hurting its prospects. That's why it's worth looking further into this stock because while these fundamentals look good, there could be other issues with the business.
On a final note, we found 3 warning signs for Canacol Energy (1 is significant) you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.