What We Make Of Canacol Energy's (TSE:CNE) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Canacol Energy (TSE:CNE) looks quite promising in regards to its trends of return on capital.

What is 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 Canacol Energy:

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

0.18 = US$114m ÷ (US$746m - US$108m) (Based on the trailing twelve months to March 2020).

Therefore, Canacol Energy has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 5.7% 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'd like to see what analysts are forecasting going forward, you should check out our free report for Canacol Energy.

So How Is Canacol Energy's ROCE Trending?

We're delighted to see that Canacol Energy is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 18% on its capital. While returns have increased, the amount of capital employed by Canacol Energy has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line On Canacol Energy's ROCE

To sum it up, Canacol Energy is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a solid 69% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing, we've spotted 3 warning signs facing Canacol Energy that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

This article by Simply Wall St is general in nature. 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.

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