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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Athabasca Oil (TSE:ATH) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Athabasca Oil:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = CA$387m ÷ (CA$2.2b - CA$198m) (Based on the trailing twelve months to September 2024).
Thus, Athabasca Oil has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 9.4% generated by the Oil and Gas industry.
View our latest analysis for Athabasca Oil
Above you can see how the current ROCE for Athabasca Oil compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Athabasca Oil .
The Trend Of ROCE
We're delighted to see that Athabasca Oil is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 19% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
The Bottom Line On Athabasca Oil's ROCE
In summary, we're delighted to see that Athabasca Oil has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 868% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Athabasca Oil can keep these trends up, it could have a bright future ahead.