Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don’t think Epsilon Energy (NASDAQ:EPSN) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.
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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 Epsilon Energy, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.064 = US$7.4m ÷ (US$126m – US$9.3m) (Based on the trailing twelve months to March 2025).
Thus, Epsilon Energy has an ROCE of 6.4%. Ultimately, that’s a low return and it under-performs the Oil and Gas industry average of 9.8%.
View our latest analysis for Epsilon Energy
In the above chart we have measured Epsilon Energy’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering Epsilon Energy for free.
When we looked at the ROCE trend at Epsilon Energy, we didn’t gain much confidence. Around five years ago the returns on capital were 11%, but since then they’ve fallen to 6.4%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Epsilon Energy. And the stock has done incredibly well with a 198% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we’d be optimistic on the stock going forward.
Epsilon Energy does have some risks, we noticed 2 warning signs (and 1 which can’t be ignored) we think you should know about.
While Epsilon 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.
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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.