There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 DNO (OB:DNO), they do have a high ROCE, but we weren't exactly elated from how returns are trending.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on DNO is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.29 = US$687m ÷ (US$2.8b - US$366m) (Based on the trailing twelve months to September 2022).
Therefore, DNO has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.
See our latest analysis for DNO
Above you can see how the current ROCE for DNO compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for DNO.
What Can We Tell From DNO's ROCE Trend?
On the surface, the trend of ROCE at DNO doesn't inspire confidence. Historically returns on capital were even higher at 37%, but they have dropped over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that DNO is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 41% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
If you want to know some of the risks facing DNO we've found 3 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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.
About OB:DNO
DNO
Engages in the exploration, development, and production of oil and gas assets in the Middle East, the North Sea, and West Africa.
Excellent balance sheet with proven track record.
