Stock Analysis

Is There More Growth In Store For Ratio Oil Exploration (1992) Limited Partnership's (TLV:RATI.L) Returns On Capital?

TASE:RATI
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Ratio Oil Exploration (1992) Limited Partnership (TLV:RATI.L) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Ratio Oil Exploration (1992) Limited Partnership:

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

0.084 = US$80m ÷ (US$1.1b - US$161m) (Based on the trailing twelve months to September 2020).

Thus, Ratio Oil Exploration (1992) Limited Partnership has an ROCE of 8.4%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 12%.

View our latest analysis for Ratio Oil Exploration (1992) Limited Partnership

roce
TASE:RATI.L Return on Capital Employed March 5th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ratio Oil Exploration (1992) Limited Partnership's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Ratio Oil Exploration (1992) Limited Partnership, check out these free graphs here.

What Does the ROCE Trend For Ratio Oil Exploration (1992) Limited Partnership Tell Us?

We're delighted to see that Ratio Oil Exploration (1992) Limited Partnership is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 8.4% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Ratio Oil Exploration (1992) Limited Partnership is utilizing 336% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 14% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On Ratio Oil Exploration (1992) Limited Partnership's ROCE

To the delight of most shareholders, Ratio Oil Exploration (1992) Limited Partnership has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 31% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we found 2 warning signs for Ratio Oil Exploration (1992) Limited Partnership (1 can't be ignored) you should be aware of.

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