We Like These Underlying Return On Capital Trends At Hindustan Oil Exploration (NSE:HINDOILEXP)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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.

What is Return On Capital Employed (ROCE)?

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. 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)

0.028 = ₹283m ÷ (₹12b - ₹1.8b) (Based on the trailing twelve months to June 2021).

Therefore, Hindustan Oil Exploration has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 13%.

See 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'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.

What Does the ROCE Trend For Hindustan Oil Exploration Tell Us?

We're delighted to see that Hindustan Oil Exploration is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 2.8% on its capital. Not only that, but the company is utilizing 135% more capital than before, but that's to be expected from a company trying to break into profitability. 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.

The Bottom Line On Hindustan Oil Exploration's ROCE

Long story short, we're delighted to see that Hindustan Oil Exploration's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 258% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Hindustan Oil Exploration, you might be interested to know about the 3 warning signs that our analysis has discovered.

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.
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