Benzinga | Jun 9, 2021 10:43AM EDT

Evolution Petroleum Insights: Return On Capital Employed

Evolution Petroleum (AMEX:EPM) posted a 106.27% decrease in earnings from Q2. Sales, however, increased by 32.38% over the previous quarter to $7.64 million. Despite the increase in sales this quarter, the decrease in earnings may suggest Evolution Petroleum is not utilizing their capital as effectively as possible. In Q2, Evolution Petroleum brought in $5.77 million in sales but lost $15.63 million in earnings.

What Is Return On Capital Employed?

Return on Capital Employed is a measure of yearly pre-tax profit relative to capital employed by a business. Changes in earnings and sales indicate shifts in a company's ROCE. A higher ROCE is generally representative of successful growth of a company and is a sign of higher earnings per share in the future. A low or negative ROCE suggests the opposite. In Q3, Evolution Petroleum posted an ROCE of 0.02%.

Keep in mind, while ROCE is a good measure of a company's recent performance, it is not a highly reliable predictor of a company's earnings or sales in the near future.

ROCE is an important metric for the comparison of similar companies. A relatively high ROCE shows Evolution Petroleum is potentially operating at a higher level of efficiency than other companies in its industry. If the company is generating high profits with its current level of capital, some of that money can be reinvested in more capital which will generally lead to higher returns and earnings per share growth.

In Evolution Petroleum's case, the positive ROCE ratio will be something investors pay attention to before making long-term financial decisions.

Q3 Earnings Recap

Evolution Petroleum reported Q3 earnings per share at $0.04/share, which beat analyst predictions of $0.02/share.