To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Australis Oil & Gas' (ASX:ATS) returns on capital, so let's have a look.

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. To calculate this metric for Australis Oil & Gas, this is the formula:

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

0.034 = US$2.6m ÷ (US$90m - US$13m) (Based on the trailing twelve months to December 2022).

Therefore, Australis Oil & Gas has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 16%.

See our latest analysis for Australis Oil & Gas

In the above chart we have measured Australis Oil & Gas' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Australis Oil & Gas is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Australis Oil & Gas is using 37% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Australis Oil & Gas could be selling under-performing assets since the ROCE is improving.

In Conclusion...

From what we've seen above, Australis Oil & Gas has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has dived 94% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

One final note, you should learn about the 4 warning signs we've spotted with Australis Oil & Gas (including 1 which is a bit unpleasant) .