Hindustan Oil Exploration (NSE:HINDOILEXP) Is Doing The Right Things To Multiply Its Share Price

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Hindustan Oil Exploration's (NSE:HINDOILEXP) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Hindustan Oil Exploration:

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

0.11 = ₹1.3b ÷ (₹16b - ₹4.3b) (Based on the trailing twelve months to December 2022).

Therefore, Hindustan Oil Exploration has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Oil and Gas industry average of 13%.

View our latest analysis for Hindustan Oil Exploration

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hindustan Oil Exploration's ROCE against it's prior returns. If you'd like to look at how Hindustan Oil Exploration has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We like the trends that we're seeing from Hindustan Oil Exploration. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 149%. So we're very much inspired by what we're seeing at Hindustan Oil Exploration thanks to its ability to profitably reinvest capital.

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 26% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. 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.

What We Can Learn From Hindustan Oil Exploration's ROCE

All in all, it's terrific to see that Hindustan Oil Exploration is reaping the rewards from prior investments and is growing its capital base. Since the stock has only returned 27% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One final note, you should learn about the 3 warning signs we've spotted with Hindustan Oil Exploration (including 1 which is a bit unpleasant) .

While Hindustan Oil Exploration isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.