There are a few key trends to watch if we want to identify the next multi-bagger. In a perfect world, we’d like to see a company invest more capital into its business, and ideally the returns on that capital increase as well. Ultimately, this demonstrates that this is a company that reinvests its profits at increasing rates of return. Speaking of which, we’ve noticed big changes in Murphy Oil’s (NYSE:MUR) is coming back on capital, so let’s take a look.
Return on capital employed (ROCE): what is it?
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. The formula for this calculation on Murphy Oil is:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.16 = US$1.5 billion ÷ (US$10 billion – US$1.0 billion) (Based on the last twelve months to June 2023).
SO, Murphy Oil has an ROCE of 16%. In absolute terms this is a fairly standard return, but compared to the oil and gas sector average it lags behind.
Check out our latest analysis for Murphy Oil
In the chart above, we measured Murphy Oil’s past ROCE against its past performance, but the future is arguably more important. If you are interested, you can view analyst forecasts in our free report on analyst forecasts for the company.
The ROCE trend
Murphy Oil shows promise as its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has increased by 991% while employing roughly the same amount of capital. Basically, the company generates higher returns with the same amount of capital, which proves that the efficiency of the company is improving. On this front, things are looking good and so it’s worth exploring what management has said about future growth plans.
Murphy Oil’s Net ROCE
To sum it all up, Murphy Oil has done well to increase the returns it generates on its capital employed. And investors appear to expect more in the future, as the stock has rewarded shareholders with a 64% return over the past five years. Given that the stock has proven to exhibit promising trends, it’s worth researching the company further to see if these trends are likely to persist.
One last note, you should find out about the 3 warning signs that we spotted with Murphy Oil (including 1 that cannot be ignored).
For those who like to invest in solid businesses, Look at this free list of companies with strong balance sheets and high returns on equity.
The assessment is complex, but we help to simplify it.
Find out if Murphy Oil is potentially overvalued or undervalued by checking out our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to constitute financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or your financial situation. Our goal is to provide you with targeted, long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
