Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Brookside Energy (ASX:BRK) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Brookside Energy:

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

0.13 = AU$12m ÷ (AU$108m - AU$15m) (Based on the trailing twelve months to June 2024).

So, Brookside Energy has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 7.2% generated by the Oil and Gas industry.

View our latest analysis for Brookside Energy

Above you can see how the current ROCE for Brookside Energy 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 analyst report for Brookside Energy .

What Does the ROCE Trend For Brookside Energy Tell Us?

Investors would be pleased with what's happening at Brookside Energy. Over the last five years, returns on capital employed have risen substantially to 13%. The amount of capital employed has increased too, by 1,049%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Brookside Energy has decreased current liabilities to 13% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

In Conclusion...

To sum it up, Brookside Energy has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 98% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Brookside Energy can keep these trends up, it could have a bright future ahead.