Returns On Capital Are Showing Encouraging Signs At Australis Oil & Gas (ASX:ATS)

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Australis Oil & Gas (ASX:ATS) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Australis Oil & Gas, this is the formula:

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

0.034 = US$2.6m ÷ (US$90m - US$13m) (Based on the trailing twelve months to December 2022).

Therefore, Australis Oil & Gas has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 16%.

Check out our latest analysis for Australis Oil & Gas

Above you can see how the current ROCE for Australis Oil & Gas 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 report for Australis Oil & Gas.

The Trend Of ROCE

Like most people, we're pleased that Australis Oil & Gas is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Australis Oil & Gas is using 37% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

The Key Takeaway

In a nutshell, we're pleased to see that Australis Oil & Gas has been able to generate higher returns from less capital. Although the company may be facing some issues elsewhere since the stock has plunged 95% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Australis Oil & Gas does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is concerning...

While Australis Oil & Gas 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.