If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of APA (NASDAQ:APA) looks great, so lets see what the trend can tell us.
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. Analysts use this formula to calculate it for APA:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.44 = US$4.7b ÷ (US$13b - US$2.5b) (Based on the trailing twelve months to March 2023).
Thus, APA has an ROCE of 44%. That's a fantastic return and not only that, it outpaces the average of 23% earned by companies in a similar industry.
View our latest analysis for APA
In the above chart we have measured APA's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for APA.
How Are Returns Trending?
APA has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 849% over the trailing five years. The company is now earning US$0.4 per dollar of capital employed. In regards to capital employed, APA appears to been achieving more with less, since the business is using 45% less capital to run its operation. APA may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Bottom Line On APA's ROCE
From what we've seen above, APA has managed to increase it's returns on capital all the while reducing it's capital base. Astute investors may have an opportunity here because the stock has declined 16% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
On a final note, we've found 1 warning sign for APA that we think you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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 NasdaqGS:APA
APA
An independent energy company, explores for, develops, and produces natural gas, crude oil, and natural gas liquids.
Undervalued established dividend payer.
