Investors Shouldn't Overlook Vår Energi's (OB:VAR) Impressive Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Vår Energi (OB:VAR) we really liked what we saw.

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. To calculate this metric for Vår Energi, this is the formula:

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

0.44 = US$6.6b ÷ (US$18b - US$3.2b) (Based on the trailing twelve months to March 2023).

Thus, Vår Energi has an ROCE of 44%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 15%.

See our latest analysis for Vår Energi

Above you can see how the current ROCE for Vår Energi compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Vår Energi here for free.

SWOT Analysis for Vår Energi

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Vår Energi are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 44%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 151%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Vår Energi has. And since the stock has fallen 17% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing, we've spotted 3 warning signs facing Vår Energi that you might find interesting.

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.