Returns At Continental Resources (NYSE:CLR) Are On The Way Up

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Continental Resources (NYSE:CLR) and its trend of ROCE, we really liked what we saw.

What is 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. To calculate this metric for Continental Resources, this is the formula:

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

0.0031 = US$42m ÷ (US$15b - US$1.2b) (Based on the trailing twelve months to March 2021).

So, Continental Resources has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 6.7%.

Check out our latest analysis for Continental Resources

Above you can see how the current ROCE for Continental Resources compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Continental Resources' ROCE Trend?

We're delighted to see that Continental Resources is reaping rewards from its investments and has now broken into profitability. The company now earns 0.3% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Continental Resources has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line

To sum it up, Continental Resources is collecting higher returns from the same amount of capital, and that's impressive. Astute investors may have an opportunity here because the stock has declined 16% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about Continental Resources, we've spotted 3 warning signs, and 2 of them are significant.

While Continental Resources isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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