Yahoo Finance Why The 36% Return On Capital At Horizon Oil (ASX:HZN) Should Have Your Attention
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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at Horizon Oil's (ASX:HZN) look very promising so lets take a look.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Horizon Oil:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.36 = US$57m ÷ (US$183m - US$28m) (Based on the trailing twelve months to June 2023).
Therefore, Horizon Oil has an ROCE of 36%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 16%.
View our latest analysis for Horizon Oil
Historical performance is a great place to start when researching a stock so above you can see the gauge for Horizon Oil's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Horizon Oil, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
You'd find it hard not to be impressed with the ROCE trend at Horizon Oil. The data shows that returns on capital have increased by 137% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Horizon Oil appears to been achieving more with less, since the business is using 23% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
On a related note, the company's ratio of current liabilities to total assets has decreased to 15%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
What We Can Learn From Horizon Oil's ROCE
In a nutshell, we're pleased to see that Horizon Oil has been able to generate higher returns from less capital. And a remarkable 213% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Horizon Oil can keep these trends up, it could have a bright future ahead.
One more thing, we've spotted 1 warning sign facing Horizon Oil that you might find interesting.
Horizon Oil is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
