There's Been No Shortage Of Growth Recently For Avance Gas Holding's (OB:AGAS) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Avance Gas Holding (OB:AGAS) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Avance Gas Holding:

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

0.18 = US$213m ÷ (US$1.2b - US$49m) (Based on the trailing twelve months to March 2024).

So, Avance Gas Holding has an ROCE of 18%. That's a pretty standard return and it's in line with the industry average of 18%.

View our latest analysis for Avance Gas Holding

In the above chart we have measured Avance Gas Holding's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Avance Gas Holding .

The Trend Of ROCE

We're delighted to see that Avance Gas Holding is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 18% on its capital. Not only that, but the company is utilizing 120% 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.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 4.0%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Avance Gas Holding has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Avance Gas Holding's ROCE

Long story short, we're delighted to see that Avance Gas Holding's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 1,521% 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.

Avance Gas Holding does have some risks, we noticed 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

While Avance Gas Holding 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.