The Trend Of High Returns At Hess (NYSE:HES) Has Us Very Interested

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. With that in mind, the ROCE of Hess (NYSE:HES) looks great, so lets see what the trend can tell us.

Understanding 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. Analysts use this formula to calculate it for Hess:

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

0.21 = US$4.1b ÷ (US$22b - US$2.3b) (Based on the trailing twelve months to December 2022).

Therefore, Hess has an ROCE of 21%. On its own that's a fantastic return on capital, though it's the same as the Oil and Gas industry average of 21%.

View our latest analysis for Hess

In the above chart we have measured Hess' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Hess here for free.

What The Trend Of ROCE Can Tell Us

Shareholders will be relieved that Hess has broken into profitability. The company now earns 21% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Hess has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. 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

In summary, we're delighted to see that Hess has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 216% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Hess can keep these trends up, it could have a bright future ahead.

Hess does have some risks though, and we've spotted 1 warning sign for Hess that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.