Be Wary Of Oil and Gas Exploration and Production AD (BUL:NGAZ) And Its Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Oil and Gas Exploration and Production AD (BUL:NGAZ) we aren't filled with optimism, but let's investigate further.

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

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 and Gas Exploration and Production AD is:

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

0.015 = лв1.5m ÷ (лв125m - лв26m) (Based on the trailing twelve months to June 2023).

So, Oil and Gas Exploration and Production AD has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 15%.

See our latest analysis for Oil and Gas Exploration and Production AD

Historical performance is a great place to start when researching a stock so above you can see the gauge for Oil and Gas Exploration and Production AD's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Oil and Gas Exploration and Production AD, check out these free graphs here.

The Trend Of ROCE

In terms of Oil and Gas Exploration and Production AD's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 3.2% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Oil and Gas Exploration and Production AD to turn into a multi-bagger.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Oil and Gas Exploration and Production AD we've found 4 warning signs (2 can't be ignored!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.