Investors Could Be Concerned With Hindustan Oil Exploration's (NSE:HINDOILEXP) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Having said that, from a first glance at Hindustan Oil Exploration (NSE:HINDOILEXP) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

0.10 = ₹1.6b ÷ (₹19b - ₹3.7b) (Based on the trailing twelve months to December 2024).

So, Hindustan Oil Exploration has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Oil and Gas industry average of 11%.

View our latest analysis for Hindustan Oil Exploration

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hindustan Oil Exploration.

The Trend Of ROCE

When we looked at the ROCE trend at Hindustan Oil Exploration, we didn't gain much confidence. To be more specific, ROCE has fallen from 18% over the last five years. However it looks like Hindustan Oil Exploration might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Hindustan Oil Exploration's ROCE

Bringing it all together, while we're somewhat encouraged by Hindustan Oil Exploration's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 358% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

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.

While Hindustan Oil Exploration may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.