Returns At International Petroleum (TSE:IPCO) Appear To Be Weighed Down
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over International Petroleum's (TSE:IPCO) trend of ROCE, we liked what we saw.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on International Petroleum is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$219m ÷ (US$2.1b - US$203m) (Based on the trailing twelve months to December 2023).
Thus, International Petroleum has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 9.8% it's much better.
View our latest analysis for International Petroleum
In the above chart we have measured International Petroleum's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering International Petroleum here for free.
What Does the ROCE Trend For International Petroleum Tell Us?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 55% more capital into its operations. 12% is a pretty standard return, and it provides some comfort knowing that International Petroleum has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
In Conclusion...
To sum it up, International Petroleum has simply been reinvesting capital steadily, at those decent rates of return. And the stock has done incredibly well with a 162% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
If you want to know some of the risks facing International Petroleum we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
