To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Surgutneftegas (MCX:SNGS), we don't think it's current trends fit the mold of a multi-bagger.
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 Surgutneftegas is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = ₽313b ÷ (₽6.1t - ₽375b) (Based on the trailing twelve months to June 2021).
So, Surgutneftegas has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 10%.
See our latest analysis for Surgutneftegas
Above you can see how the current ROCE for Surgutneftegas 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 Surgutneftegas here for free.
What Does the ROCE Trend For Surgutneftegas Tell Us?
In terms of Surgutneftegas' historical ROCE trend, it doesn't exactly demand attention. The company has employed 57% more capital in the last five years, and the returns on that capital have remained stable at 5.5%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
In Conclusion...
In summary, Surgutneftegas has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 38% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
Like most companies, Surgutneftegas does come with some risks, and we've found 1 warning sign that you should be aware of.
While Surgutneftegas 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.
About MISX:SNGS
Surgutneftegas
Surgutneftegas Public Joint Stock Company, together with its subsidiaries, engages in the exploration and production of hydrocarbons in Russia.
Flawless balance sheet and good value.
