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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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Victoria Oil & Gas (LON:VOG) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Victoria Oil & Gas:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = US$963k ÷ (US$51m - US$32m) (Based on the trailing twelve months to December 2020).
Thus, Victoria Oil & Gas has an ROCE of 5.0%. On its own that's a low return, but compared to the average of 4.0% generated by the Oil and Gas industry, it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Victoria Oil & Gas' ROCE against it's prior returns. If you'd like to look at how Victoria Oil & Gas has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Victoria Oil & Gas' ROCE Trend?
We're delighted to see that Victoria Oil & Gas is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 5.0% on their capital employed. In regards to capital employed, Victoria Oil & Gas is using 86% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 62% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.
What We Can Learn From Victoria Oil & Gas' ROCE
In the end, Victoria Oil & Gas has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has dived 88% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.
On a final note, we found 3 warning signs for Victoria Oil & Gas (1 is potentially serious) you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
This article by Simply Wall St is general in nature. 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.
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