Yahoo Finance Australis Oil & Gas (ASX:ATS) Is Doing The Right Things To Multiply Its Share Price
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Australis Oil & Gas (ASX:ATS) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Australis Oil & Gas:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.019 = US$1.4m ÷ (US$91m - US$16m) (Based on the trailing twelve months to June 2022).
So, Australis Oil & Gas has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 13%.
Check out our latest analysis for Australis 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 want to delve into the historical earnings, revenue and cash flow of Australis Oil & Gas, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
Like most people, we're pleased that Australis Oil & Gas is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 1.9% on their capital employed. 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 38%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 17% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
Our Take On Australis Oil & Gas' ROCE
In summary, it's great to see that Australis Oil & Gas has been able to turn things around and earn higher returns on lower amounts of capital. Although the company may be facing some issues elsewhere since the stock has plunged 75% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.
On a separate note, we've found 2 warning signs for Australis Oil & Gas you'll probably want to know about.
While Australis Oil & 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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