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’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Centaurus Energy (CVE:CTA) looks great, so lets see what the trend can tell us.
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 Centaurus Energy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.36 = US$3.9m ÷ (US$16m – US$5.2m) (Based on the trailing twelve months to September 2024).
So, Centaurus Energy has an ROCE of 36%. That’s a fantastic return and not only that, it outpaces the average of 9.4% earned by companies in a similar industry.
View our latest analysis for Centaurus Energy
Historical performance is a great place to start when researching a stock so above you can see the gauge for Centaurus Energy’s ROCE against it’s prior returns. If you’d like to look at how Centaurus Energy has performed in the past in other metrics, you can view this free graph of Centaurus Energy’s past earnings, revenue and cash flow.
It’s great to see that Centaurus 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. Additionally, the business is utilizing 80% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.
From what we’ve seen above, Centaurus Energy has managed to increase it’s returns on capital all the while reducing it’s capital base. However the stock is down a substantial 92% in the last five years so there could be other areas of the business hurting its 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, Centaurus Energy does come with some risks, and we’ve found 3 warning signs that you should be aware of.
