Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Imperial Petroleum (NASDAQ:IMPP) and its trend of ROCE, we really liked what we saw.
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 Imperial Petroleum, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = US$15m ÷ (US$322m - US$19m) (Based on the trailing twelve months to September 2022).
Therefore, Imperial Petroleum has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 21%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Imperial Petroleum's ROCE against it's prior returns. If you're interested in investigating Imperial Petroleum's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
We're delighted to see that Imperial Petroleum is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making two years ago but is is now generating 4.8% on its capital. In addition to that, Imperial Petroleum is employing 122% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Bottom Line
Overall, Imperial Petroleum gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Although the company may be facing some issues elsewhere since the stock has plunged 95% in the last year. Still, it's worth doing some further research to see if the trends will continue into the future.
If you want to know some of the risks facing Imperial Petroleum we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.
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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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