There's Been No Shortage Of Growth Recently For Woodside Petroleum's (ASX:WPL) Returns On Capital

By
Simply Wall St
Published
October 17, 2021
ASX:WPL
Source: Shutterstock

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Woodside Petroleum (ASX:WPL) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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 Woodside Petroleum, this is the formula:

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

0.029 = US$646m ÷ (US$24b - US$1.4b) (Based on the trailing twelve months to June 2021).

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

Check out our latest analysis for Woodside Petroleum

roce
ASX:WPL Return on Capital Employed October 18th 2021

Above you can see how the current ROCE for Woodside Petroleum 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.

What The Trend Of ROCE Can Tell Us

Shareholders will be relieved that Woodside Petroleum has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 2.9%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

Our Take On Woodside Petroleum's ROCE

To bring it all together, Woodside Petroleum has done well to increase the returns it's generating from its capital employed. Considering the stock has delivered 6.9% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

One more thing to note, we've identified 1 warning sign with Woodside Petroleum and understanding it should be part of your investment process.

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.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.