Yahoo Finance Victoria Oil & Gas (LON:VOG) Shareholders Will Want The ROCE Trajectory To Continue
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, we've noticed some promising trends at Victoria Oil & Gas (LON:VOG) so let's look a bit deeper.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Victoria Oil & Gas, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$3.0m ÷ (US$47m - US$30m) (Based on the trailing twelve months to June 2021).
Thus, Victoria Oil & Gas has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 3.8% generated by the Oil and Gas industry.
View our latest analysis for Victoria Oil & Gas
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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 The Trend Of ROCE Can Tell Us
We're delighted to see that Victoria Oil & Gas is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 17% which is no doubt a relief for some early shareholders. 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. Effectively this means that suppliers or short-term creditors are now funding 64% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
In Conclusion...
In a nutshell, we're pleased to see that Victoria Oil & Gas has been able to generate higher returns from less capital. Although the company may be facing some issues elsewhere since the stock has plunged 87% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
One final note, you should learn about the 3 warning signs we've spotted with Victoria Oil & Gas (including 1 which doesn't sit too well with us) .
While Victoria Oil & 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.
