Shareholders Would Enjoy A Repeat Of EssoF's (EPA:ES) Recent Growth In Returns

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at EssoF's (EPA:ES) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for EssoF, this is the formula:

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

0.35 = €686m ÷ (€3.9b - €2.0b) (Based on the trailing twelve months to December 2021).

Thus, EssoF has an ROCE of 35%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 13%.

View our latest analysis for EssoF

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

How Are Returns Trending?

EssoF's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 114% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 50% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

Our Take On EssoF's ROCE

In summary, we're delighted to see that EssoF has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing: We've identified 2 warning signs with EssoF (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.