Yahoo Finance Byron Energy (ASX:BYE) Might Have The Makings Of A Multi-Bagger
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So on that note, Byron Energy (ASX:BYE) looks quite promising in regards to its trends of return on capital.
What is Return On Capital Employed (ROCE)?
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 Byron Energy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = US$3.4m ÷ (US$118m - US$20m) (Based on the trailing twelve months to December 2020).
Thus, Byron Energy has an ROCE of 3.4%. In absolute terms, that's a low return, but it's much better than the Oil and Gas industry average of 1.3%.
Check out our latest analysis for Byron 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 Byron Energy's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
We're delighted to see that Byron Energy is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 3.4% on its capital. Not only that, but the company is utilizing 223% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 17% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
The Bottom Line On Byron Energy's ROCE
Long story short, we're delighted to see that Byron Energy's reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 37% 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.
If you'd like to know more about Byron Energy, we've spotted 3 warning signs, and 1 of them is potentially serious.
While Byron Energy may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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