Athabasca Oil (TSE:ATH) Might Have The Makings Of A Multi-Bagger

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Athabasca Oil's (TSE:ATH) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Athabasca Oil:

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

0.19 = CA$387m ÷ (CA$2.2b - CA$198m) (Based on the trailing twelve months to September 2024).

Therefore, Athabasca Oil has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Oil and Gas industry.

Check out our latest analysis for Athabasca Oil

Above you can see how the current ROCE for Athabasca Oil compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Athabasca Oil for free.

What The Trend Of ROCE Can Tell Us

Shareholders will be relieved that Athabasca Oil has broken into profitability. The company now earns 19% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Athabasca Oil has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

In Conclusion...

In summary, we're delighted to see that Athabasca Oil has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Athabasca Oil can keep these trends up, it could have a bright future ahead.

Athabasca Oil does have some risks though, and we've spotted 1 warning sign for Athabasca Oil that you might be interested in.

While Athabasca Oil isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.