Hindustan Oil Exploration (NSE:HINDOILEXP) Shareholders Will Want The ROCE Trajectory To Continue

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Hindustan Oil Exploration (NSE:HINDOILEXP) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Hindustan Oil Exploration, this is the formula:

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

0.03 = ₹255m ÷ (₹10b - ₹1.5b) (Based on the trailing twelve months to December 2020).

Thus, Hindustan Oil Exploration has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 5.1%.

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.

How Are Returns Trending?

We're delighted to see that Hindustan Oil Exploration 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 3.0% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Hindustan Oil Exploration is utilizing 109% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

Our Take On Hindustan Oil Exploration's ROCE

Overall, Hindustan Oil Exploration gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a staggering 171% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing Hindustan Oil Exploration, we've discovered 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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