If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, the ROCE of APA (NASDAQ:APA) looks great, so lets see what the trend can tell us.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on APA is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = US$2.8b ÷ (US$13b - US$2.6b) (Based on the trailing twelve months to June 2023).
Thus, APA has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 21% 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.
So How Is APA's ROCE Trending?
APA has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 279%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, APA appears to been achieving more with less, since the business is using 46% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
In Conclusion...
From what we've seen above, APA has managed to increase it's returns on capital all the while reducing it's capital base. Considering the stock has delivered 5.1% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
On a final note, we've found 3 warning signs for APA that we think you should be aware of.
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.
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.
