Returns On Capital Are Showing Encouraging Signs At New Zealand Oil & Gas (NZSE:NZO)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at New Zealand Oil & Gas (NZSE:NZO) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on New Zealand Oil & Gas is:

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

0.10 = NZ$26m ÷ (NZ$271m - NZ$20m) (Based on the trailing twelve months to December 2023).

Thus, New Zealand Oil & Gas has an ROCE of 10%. That's a pretty standard return and it's in line with the industry average of 10%.

See our latest analysis for New Zealand Oil & Gas

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating New Zealand Oil & Gas' past further, check out this free graph covering New Zealand Oil & Gas' past earnings, revenue and cash flow.

How Are Returns Trending?

New Zealand Oil & Gas has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 10% on its capital. In addition to that, New Zealand Oil & Gas is employing 47% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Key Takeaway

In summary, it's great to see that New Zealand Oil & Gas has managed to break into profitability and is continuing to reinvest in its business. Given the stock has declined 10% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, New Zealand Oil & Gas does come with some risks, and we've found 3 warning signs that you should be aware of.

While New Zealand Oil & Gas 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. 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.