ONE Gas (NYSE:OGS) Has Some Way To Go To Become A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at ONE Gas (NYSE:OGS) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 ONE Gas, this is the formula:

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

0.054 = US$335m ÷ (US$7.3b - US$1.1b) (Based on the trailing twelve months to September 2022).

So, ONE Gas has an ROCE of 5.4%. Even though it's in line with the industry average of 5.4%, it's still a low return by itself.

Check out our latest analysis for ONE Gas

Above you can see how the current ROCE for ONE Gas 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 Does the ROCE Trend For ONE Gas Tell Us?

The returns on capital haven't changed much for ONE Gas in recent years. The company has consistently earned 5.4% for the last five years, and the capital employed within the business has risen 36% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

In summary, ONE Gas has simply been reinvesting capital and generating the same low rate of return as before. And with the stock having returned a mere 18% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing to note, we've identified 3 warning signs with ONE Gas and understanding them should be part of your investment process.

While ONE Gas 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.