The Return Trends At Australis Oil & Gas (ASX:ATS) Look Promising

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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 Australis Oil & Gas (ASX:ATS) and its trend of ROCE, we really liked what we saw.

What Is 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)

0.0093 = US$700k ÷ (US$91m - US$16m) (Based on the trailing twelve months to June 2022).

Therefore, Australis Oil & Gas has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 13%.

Check out the opportunities and risks within the AU Oil and Gas industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Australis Oil & Gas' ROCE against it's prior returns. If you'd like to look at how Australis Oil & Gas has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Australis Oil & Gas' ROCE Trend?

We're delighted to see that Australis Oil & Gas is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 0.9% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 38%. Australis Oil & Gas could be selling under-performing assets since the ROCE is improving.

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 17% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From Australis Oil & Gas' ROCE

In the end, Australis Oil & Gas has proven it's capital allocation skills are good with those higher returns from less amount of capital. However the stock is down a substantial 86% in the last five years so there could be other areas of the business hurting its prospects. Still, it's worth doing some further research to see if the trends will continue into the future.

If you'd like to know about the risks facing Australis Oil & Gas, we've discovered 3 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.