Egdon Resources (LON:EDR) capital returns rise

If you’re looking for a multi-bagger, there are a few things to watch out for. First, we’ll want to see proof come back on capital employed (ROCE) which is increasing, and on the other hand, a base capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. With this in mind, we have noticed some promising trends in Eddon Resources (LON:EDR) so let’s look a little deeper.

Understanding return on capital employed (ROCE)

If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. Analysts use this formula to calculate it for Egdon Resources:

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

0.026 = UK£833,000 ÷ (UK£35m – UK£2.3m) (Based on the last twelve months to January 2022).

So, Egdon Resources has an ROI of 2.6%. In absolute terms, this is a weak return and it is also below the oil and gas industry average of 9.5%.

Check out our latest analysis for Egdon Resources

Above, you can see how Egdon Resources’ current ROCE compares to its past returns on capital, but you can’t say anything about the past. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.

What does the ROCE trend tell us for Egdon resources?

Shareholders will be relieved that Egdon Resources has become profitable. The company was generating losses five years ago, but has managed to turn things around and, as we saw earlier, is now earning 2.6%, which is always encouraging. On top of that, what is interesting is that the amount of capital used remained stable, so the company did not need to invest additional money to generate these higher returns. In the absence of a noticeable increase in capital employed, it is useful to know what the business plans to do in the future with respect to reinvestment and business growth. Because at the end of the day, a business can only be so efficient.

Egdon Resources ROCE Basics

To sum up, Egdon Resources reaps higher returns from the same amount of capital, and that’s impressive. And since the stock has fallen 33% in the last five years, there could be an opportunity here. With that in mind, we believe the promising trends warrant further investigation of this stock.

Egdon Resources has certain risks, we have noticed 4 warning signs (and 1 that can’t be ignored) that we think you should know about.

If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive returns on equity.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.