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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at Bass Oil (ASX:BAS) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Bass Oil is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = US$526k ÷ (US$12m - US$1.5m) (Based on the trailing twelve months to June 2024).
Therefore, Bass Oil has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 6.8%.
View our latest analysis for Bass Oil
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Bass Oil.
How Are Returns Trending?
Unfortunately, the trend isn't great with ROCE falling from 31% five years ago, while capital employed has grown 743%. That being said, Bass Oil raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. 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.
What We Can Learn From Bass Oil's ROCE
To conclude, we've found that Bass Oil is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 75% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.