Yahoo Finance Returns On Capital Are A Standout For APA (NASDAQ:APA)
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. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at APA's (NASDAQ:APA) look very promising so lets take a 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. Analysts use this formula to calculate it for APA:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.34 = US$3.5b ÷ (US$12b - US$2.1b) (Based on the trailing twelve months to March 2022).
Therefore, APA has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 12%.
See our latest analysis for APA
In the above chart we have measured APA's 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 APA here for free.
The Trend Of ROCE
We're delighted to see that APA is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 50%. This could potentially mean that the company is selling some of its assets.
The Key Takeaway
In a nutshell, we're pleased to see that APA has been able to generate higher returns from less capital. Given the stock has declined 17% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.
APA does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.
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.
