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Forza Petroleum (TSE:FORZ) Is Doing The Right Things To Multiply Its Share Price

·3 min read

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 when we looked at Forza Petroleum (TSE:FORZ) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Forza Petroleum is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.15 = US$82m ÷ (US$634m - US$89m) (Based on the trailing twelve months to June 2022).

Thus, Forza Petroleum has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Oil and Gas industry average of 18%.

View our latest analysis for Forza Petroleum

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Historical performance is a great place to start when researching a stock so above you can see the gauge for Forza Petroleum's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Forza Petroleum, check out these free graphs here.

What Does the ROCE Trend For Forza Petroleum Tell Us?

It's great to see that Forza Petroleum has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 26% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Forza Petroleum could be selling under-performing assets since the ROCE is improving.

The Bottom Line

From what we've seen above, Forza Petroleum has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 51% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to continue researching Forza Petroleum, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Forza Petroleum 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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