TotalEnergies EP Gabon Société anonyme (EPA:EC) Is Experiencing Growth In Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at TotalEnergies EP Gabon Société anonyme (EPA:EC) and its trend of ROCE, we really liked what we saw.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for TotalEnergies EP Gabon Société anonyme, this is the formula:

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

0.061 = US$178m ÷ (US$3.1b - US$206m) (Based on the trailing twelve months to December 2022).

Thus, TotalEnergies EP Gabon Société anonyme has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 22%.

Check out our latest analysis for TotalEnergies EP Gabon Société anonyme

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of TotalEnergies EP Gabon Société anonyme, check out these free graphs here.

SWOT Analysis for TotalEnergies EP Gabon Société anonyme

So How Is TotalEnergies EP Gabon Société anonyme's ROCE Trending?

TotalEnergies EP Gabon Société anonyme has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 198%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 27% less than it was five years ago, which can be indicative of a business that's improving its efficiency. TotalEnergies EP Gabon Société anonyme may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Bottom Line

In the end, TotalEnergies EP Gabon Société anonyme has proven it's capital allocation skills are good with those higher returns from less amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, TotalEnergies EP Gabon Société anonyme does come with some risks, and we've found 3 warning signs that you should be aware of.

While TotalEnergies EP Gabon Société anonyme isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.