Stock Analysis

Returns On Capital - An Important Metric For Awilco LNG (OB:ALNG)

OB:ALNG
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Awilco LNG (OB:ALNG) and its trend of ROCE, we really liked what we saw.

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 Awilco LNG, this is the formula:

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

0.11 = US$11m ÷ (US$355m - US$256m) (Based on the trailing twelve months to September 2020).

Therefore, Awilco LNG has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.

View our latest analysis for Awilco LNG

roce
OB:ALNG Return on Capital Employed December 7th 2020

In the above chart we have measured Awilco LNG's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Awilco LNG here for free.

The Trend Of ROCE

Awilco LNG has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 4,054%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 78% less capital than it was five years ago. Awilco LNG may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 72% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line

In a nutshell, we're pleased to see that Awilco LNG has been able to generate higher returns from less capital. And since the stock has dived 78% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

One more thing to note, we've identified 3 warning signs with Awilco LNG and understanding them should be part of your investment process.

While Awilco LNG 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. 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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