We Think Granite Ridge Resources (NYSE:GRNT) Might Have The DNA Of A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Granite Ridge Resources' (NYSE:GRNT) returns on capital, so let's have a look.

What Is 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 Granite Ridge Resources, this is the formula:

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

0.42 = US$189m ÷ (US$478m - US$25m) (Based on the trailing twelve months to September 2022).

Thus, Granite Ridge Resources has an ROCE of 42%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 21%.

View our latest analysis for Granite Ridge Resources

Historical performance is a great place to start when researching a stock so above you can see the gauge for Granite Ridge Resources' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Granite Ridge Resources, check out these free graphs here.

So How Is Granite Ridge Resources' ROCE Trending?

The trends we've noticed at Granite Ridge Resources are quite reassuring. The data shows that returns on capital have increased substantially over the last one year to 42%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 60%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Key Takeaway

In summary, it's great to see that Granite Ridge Resources can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Astute investors may have an opportunity here because the stock has declined 43% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.

Granite Ridge Resources does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

Granite Ridge Resources is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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.