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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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Serinus Energy (LON:SENX) so let's look a bit deeper.
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. To calculate this metric for Serinus Energy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = US$2.5m ÷ (US$90m - US$17m) (Based on the trailing twelve months to March 2023).
So, Serinus Energy has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 13%.
See our latest analysis for Serinus Energy
In the above chart we have measured Serinus 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 report on analyst forecasts for the company.
How Are Returns Trending?
It's great to see that Serinus Energy has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Serinus Energy is using 21% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.
The Key Takeaway
In summary, it's great to see that Serinus Energy has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has dived 98% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
Like most companies, Serinus Energy does come with some risks, and we've found 2 warning signs that you should be aware of.
While Serinus Energy isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.