If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, we've noticed some promising trends at DNO (OB:DNO) so let's look a bit deeper.
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. The formula for this calculation on DNO is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$372m ÷ (US$2.9b - US$386m) (Based on the trailing twelve months to December 2021).
So, DNO has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 12% generated by the Oil and Gas industry.
Check out 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
The trends we've noticed at DNO are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 15%. The amount of capital employed has increased too, by 175%. So we're very much inspired by what we're seeing at DNO thanks to its ability to profitably reinvest capital.
What We Can Learn From DNO's ROCE
In summary, it's great to see that DNO can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 104% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if DNO can keep these trends up, it could have a bright future ahead.
On a separate note, we've found 2 warning signs for DNO you'll probably want to know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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 reasonable growth potential.
