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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Frontera Energy (TSE:FEC), we don't think it's current trends fit the mold of a multi-bagger.
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 Frontera Energy is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = US$152m ÷ (US$3.0b - US$545m) (Based on the trailing twelve months to September 2024).
Therefore, Frontera Energy has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 9.0%.
See our latest analysis for Frontera Energy
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're interested in investigating Frontera Energy's past further, check out this free graph covering Frontera Energy's past earnings, revenue and cash flow.
How Are Returns Trending?
In terms of Frontera Energy's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 8.2%, but since then they've fallen to 6.2%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by Frontera Energy's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 77% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
If you want to continue researching Frontera Energy, you might be interested to know about the 2 warning signs that our analysis has discovered.