Returns On Capital Are A Standout For Arrow Exploration (CVE:AXL)

If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount 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. Speaking of which, we noticed some great changes in Arrow Exploration’s (CVE:AXL) returns on capital, so let’s have a look.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Arrow Exploration:

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

0.26 = US$20m ÷ (US$94m – US$17m) (Based on the trailing twelve months to September 2025).

Therefore, Arrow Exploration has an ROCE of 26%. That’s a fantastic return and not only that, it outpaces the average of 8.4% earned by companies in a similar industry.

See our latest analysis for Arrow Exploration

Above you can see how the current ROCE for Arrow Exploration compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Arrow Exploration for free.

What The Trend Of ROCE Can Tell Us

We’re delighted to see that Arrow Exploration 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 26% on its capital. And unsurprisingly, like most companies trying to break into the black, Arrow Exploration is utilizing 151% more capital than it was five years ago. 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.

In another part of our analysis, we noticed that the company’s ratio of current liabilities to total assets decreased to 18%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business’ fundamental improvements, rather than a cooking class featuring this company’s books.

Our Take On Arrow Exploration’s ROCE

In summary, it’s great to see that Arrow Exploration has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Arrow Exploration does have some risks, we noticed 2 warning signs (and 1 which can’t be ignored) we think you should know about.

Arrow Exploration is not the only stock earning high returns. If you’d like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.