Will The ROCE Trend At Ratio Oil Exploration (1992) Limited Partnership (TLV:RATI.L) Continue?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Ratio Oil Exploration (1992) Limited Partnership (TLV:RATI.L) so let's look a bit deeper.

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. 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)

0.069 = US$40m ÷ (US$1.1b - US$491m) (Based on the trailing twelve months to June 2020).

Thus, Ratio Oil Exploration (1992) Limited Partnership has an ROCE of 6.9%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 14%.

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

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'd like to look at how Ratio Oil Exploration (1992) Limited Partnership has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

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

Ratio Oil Exploration (1992) Limited Partnership has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 6.9% on its capital. And unsurprisingly, like most companies trying to break into the black, Ratio Oil Exploration (1992) Limited Partnership is utilizing 164% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

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. Effectively this means that suppliers or short-term creditors are now funding 46% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line

Overall, Ratio Oil Exploration (1992) Limited Partnership gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Given the stock has declined 45% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Ratio Oil Exploration (1992) Limited Partnership does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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