Horizon Oil (ASX:HZN) Could Become A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. 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 Horizon Oil's (ASX:HZN) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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 Horizon Oil:

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

0.35 = US$50m ÷ (US$201m - US$59m) (Based on the trailing twelve months to December 2022).

Therefore, Horizon Oil has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.

See our latest analysis for Horizon Oil

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're interested in investigating Horizon Oil's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Horizon Oil's ROCE Trending?

We're pretty happy with how the ROCE has been trending at Horizon Oil. We found that the returns on capital employed over the last five years have risen by 284%. The company is now earning US$0.4 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 36% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Horizon Oil may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

Our Take On Horizon Oil's ROCE

In the end, Horizon Oil has proven it's capital allocation skills are good with those higher returns from less amount of capital. And a remarkable 115% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we've found 1 warning sign for Horizon Oil that we think you should be aware of.

Horizon Oil is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.