Returns At FLEX LNG (OB:FLNG) Are On The Way Up

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at FLEX LNG (OB:FLNG) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for FLEX LNG, this is the formula:

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

0.052 = US$125m ÷ (US$2.5b - US$132m) (Based on the trailing twelve months to June 2021).

Thus, FLEX LNG has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 7.0%.

Check out our latest analysis for FLEX LNG

In the above chart we have measured FLEX 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 FLEX LNG here for free.

What The Trend Of ROCE Can Tell Us

FLEX LNG has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 5.2% which is a sight for sore eyes. Not only that, but the company is utilizing 1,027% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In Conclusion...

To the delight of most shareholders, FLEX LNG has now broken into profitability. Since the stock has returned a solid 52% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to know some of the risks facing FLEX LNG we've found 3 warning signs (2 are potentially serious!) that you should be aware of before investing here.

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. 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.
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