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There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Obsidian Energy (TSE:OBE) looks quite promising in regards to its trends of return on capital.
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. Analysts use this formula to calculate it for Obsidian Energy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = CA$181m ÷ (CA$2.4b - CA$243m) (Based on the trailing twelve months to June 2024).
So, Obsidian Energy has an ROCE of 8.4%. On its own, that's a low figure but it's around the 9.1% average generated by the Oil and Gas industry.
View our latest analysis for Obsidian Energy
In the above chart we have measured Obsidian Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Obsidian Energy .
The Trend Of ROCE
Shareholders will be relieved that Obsidian Energy has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 8.4%, which is always encouraging. While returns have increased, the amount of capital employed by Obsidian Energy has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.
One more thing to note, Obsidian Energy has decreased current liabilities to 10% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
The Bottom Line
As discussed above, Obsidian Energy appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 663% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.