OPAL Fuels (NASDAQ:OPAL) Is Looking To Continue Growing Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, OPAL Fuels (NASDAQ:OPAL) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for OPAL Fuels, this is the formula:

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

0.015 = US$7.2m ÷ (US$656m - US$188m) (Based on the trailing twelve months to September 2022).

Thus, OPAL Fuels has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 21%.

Check out our latest analysis for OPAL Fuels

Above you can see how the current ROCE for OPAL Fuels 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 OPAL Fuels here for free.

So How Is OPAL Fuels' ROCE Trending?

We're delighted to see that OPAL Fuels is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses two years ago, but now it's earning 1.5% which is a sight for sore eyes. In addition to that, OPAL Fuels is employing 280% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

What We Can Learn From OPAL Fuels' ROCE

Overall, OPAL Fuels gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And since the stock has fallen 20% 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 identified 2 warning signs with OPAL Fuels (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

While OPAL Fuels 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.