What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Po Valley Energy (ASX:PVE) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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 Po Valley Energy:

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

0.17 = €2.6m ÷ (€16m - €727k) (Based on the trailing twelve months to June 2024).

Thus, Po Valley Energy has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Oil and Gas industry.

Check out our latest analysis for Po Valley Energy

Historical performance is a great place to start when researching a stock so above you can see the gauge for Po Valley Energy's ROCE against it's prior returns. If you're interested in investigating Po Valley Energy's past further, check out this free graph covering Po Valley Energy's past earnings, revenue and cash flow.

So How Is Po Valley Energy's ROCE Trending?

The fact that Po Valley Energy is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 17% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Po Valley Energy is utilizing 94% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In Conclusion...

Overall, Po Valley Energy gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Given the stock has declined 29% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a separate note, we've found 2 warning signs for Po Valley Energy you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.