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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Bass Oil (ASX:BAS), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Bass Oil:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = US$514k ÷ (US$12m - US$1.5m) (Based on the trailing twelve months to June 2024).
Thus, Bass Oil has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 9.1%.
See our latest analysis for Bass Oil
Historical performance is a great place to start when researching a stock so above you can see the gauge for Bass Oil's ROCE against it's prior returns. If you're interested in investigating Bass Oil's past further, check out this free graph covering Bass Oil's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
We weren't thrilled with the trend because Bass Oil's ROCE has reduced by 84% over the last five years, while the business employed 743% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Bass Oil's earnings and if they change as a result from the capital raise.
On a side note, Bass Oil has done well to pay down its current liabilities to 13% of total assets. Considering it used to be 68%, that's a huge drop in that ratio and it would explain the decline in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.