Forza Petroleum (TSE:FORZ) Is Looking To Continue Growing Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Forza Petroleum (TSE:FORZ) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Forza Petroleum is:

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

0.17 = US$97m ÷ (US$658m - US$89m) (Based on the trailing twelve months to September 2022).

Thus, Forza Petroleum has an ROCE of 17%. That's a relatively normal return on capital, and it's around the 21% generated by the Oil and Gas industry.

Check out our latest analysis for Forza Petroleum

Historical performance is a great place to start when researching a stock so above you can see the gauge for Forza Petroleum's ROCE against it's prior returns. If you're interested in investigating Forza Petroleum's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Forza Petroleum's ROCE Trending?

We're delighted to see that Forza Petroleum is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 22%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

In Conclusion...

In summary, it's great to see that Forza Petroleum has been able to turn things around and earn higher returns on lower amounts of capital.

Forza Petroleum does have some risks though, and we've spotted 5 warning signs for Forza Petroleum that you might be interested in.

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.