We Like These Underlying 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? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Hindustan Oil Exploration's (NSE:HINDOILEXP) returns on capital, so let's have a look.

Understanding 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)

0.082 = ₹675m ÷ (₹10b - ₹2.1b) (Based on the trailing twelve months to June 2020).

Thus, Hindustan Oil Exploration has an ROCE of 8.2%. On its own that's a low return, but compared to the average of 6.4% generated by the Oil and Gas industry, it's much better.

Check out 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're interested in investigating Hindustan Oil Exploration's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

The fact that Hindustan Oil Exploration is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 8.2% on its capital. And unsurprisingly, like most companies trying to break into the black, Hindustan Oil Exploration is utilizing 110% 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.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 21% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From 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. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 2 warning signs with Hindustan Oil Exploration and understanding them should be part of your investment process.

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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