Does Hindustan Oil Exploration (NSE:HINDOILEXP) Have The Makings Of A Multi-Bagger?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Hindustan Oil Exploration's (NSE:HINDOILEXP) returns on capital, so let's have a look.

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 Hindustan Oil Exploration:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.11 = ₹899m ÷ (₹10b - ₹2.1b) (Based on the trailing twelve months to March 2020).

Thus, Hindustan Oil Exploration has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 6.6% it's much better.

See our latest analysis for Hindustan Oil Exploration

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'd like to look at how Hindustan Oil Exploration has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Hindustan Oil Exploration is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 11% on its capital. And unsurprisingly, like most companies trying to break into the black, Hindustan Oil Exploration is utilizing 110% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 21% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On Hindustan Oil Exploration's ROCE

Long story short, we're delighted to see that Hindustan Oil Exploration's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 111% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know more about Hindustan Oil Exploration, we've spotted 2 warning signs, and 1 of them is a bit unpleasant.

While Hindustan Oil Exploration isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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