Gulf Keystone Petroleum (LON:GKP) Is Achieving High Returns On Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Gulf Keystone Petroleum (LON:GKP) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Gulf Keystone Petroleum is:

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

0.26 = US$174m ÷ (US$764m - US$99m) (Based on the trailing twelve months to December 2021).

So, Gulf Keystone Petroleum has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 5.6%.

See our latest analysis for Gulf Keystone Petroleum

In the above chart we have measured Gulf Keystone Petroleum's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Gulf Keystone Petroleum Tell Us?

Gulf Keystone Petroleum has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 26% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

Our Take On Gulf Keystone Petroleum's ROCE

To bring it all together, Gulf Keystone Petroleum has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 291% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to know some of the risks facing Gulf Keystone Petroleum we've found 3 warning signs (1 is significant!) that you should be aware of before investing here.

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.