The Returns At ONE Gas (NYSE:OGS) Aren't Growing

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at ONE Gas (NYSE:OGS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on ONE Gas is:

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

0.059 = US$374m ÷ (US$7.8b - US$1.5b) (Based on the trailing twelve months to December 2023).

Thus, ONE Gas has an ROCE of 5.9%. Even though it's in line with the industry average of 6.2%, it's still a low return by itself.

See 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'd like, you can check out the forecasts from the analysts covering ONE Gas for free.

The Trend Of ROCE

The returns on capital haven't changed much for ONE Gas in recent years. The company has consistently earned 5.9% for the last five years, and the capital employed within the business has risen 32% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On ONE Gas' ROCE

Long story short, while ONE Gas has been reinvesting its capital, the returns that it's generating haven't increased. And in the last five years, the stock has given away 20% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think ONE Gas has the makings of a multi-bagger.

If you want to continue researching ONE Gas, you might be interested to know about the 1 warning sign that our analysis has discovered.

While ONE Gas may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.