Returns Are Gaining Momentum At Oil Search (ASX:OSH)

By
Simply Wall St
Published
October 08, 2021
Source: Shutterstock

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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, Oil Search (ASX:OSH) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Oil Search is:

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

0.03 = US$312m ÷ (US$11b - US$707m) (Based on the trailing twelve months to June 2021).

Thus, Oil Search has an ROCE of 3.0%. Even though it's in line with the industry average of 2.9%, it's still a low return by itself.

View our latest analysis for Oil Search

roce
ASX:OSH Return on Capital Employed October 9th 2021

Above you can see how the current ROCE for Oil Search compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

While there are companies with higher returns on capital out there, we still find the trend at Oil Search promising. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 1,328% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

Our Take On Oil Search's ROCE

As discussed above, Oil Search appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And since the stock has fallen 30% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Oil Search does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

While Oil Search may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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