In This Article:
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Speaking of which, we noticed some great changes in Po Valley Energy's (ASX:PVE) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Po Valley Energy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = €941k ÷ (€15m - €326k) (Based on the trailing twelve months to December 2023).
So, Po Valley Energy has an ROCE of 6.4%. On its own, that's a low figure but it's around the 7.1% average generated by the Oil and Gas industry.
View our latest analysis for Po Valley Energy
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Po Valley Energy's past further, check out this free graph covering Po Valley Energy's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Po Valley Energy has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 6.4% on its capital. In addition to that, Po Valley Energy is employing 104% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
One more thing to note, Po Valley Energy has decreased current liabilities to 2.2% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
The Key Takeaway
Long story short, we're delighted to see that Po Valley Energy's reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 24% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.