Investors Will Want Ovintiv's (NYSE:OVV) Growth In ROCE To Persist

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Ovintiv (NYSE:OVV) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Ovintiv:

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

0.16 = US$2.7b ÷ (US$20b - US$3.2b) (Based on the trailing twelve months to June 2024).

Therefore, Ovintiv has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 12% generated by the Oil and Gas industry.

See our latest analysis for Ovintiv

In the above chart we have measured Ovintiv's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Ovintiv .

What Does the ROCE Trend For Ovintiv Tell Us?

Ovintiv has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 65% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

What We Can Learn From Ovintiv's ROCE

To bring it all together, Ovintiv has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 97% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Ovintiv (of which 1 shouldn't be ignored!) that you should know about.

While Ovintiv 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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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.