We Like These Underlying Return On Capital Trends At Gulf Keystone Petroleum (LON:GKP)
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Gulf Keystone Petroleum (LON:GKP) and its trend of ROCE, we really liked what we saw.
Understanding 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. To calculate this metric for Gulf Keystone Petroleum, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$106m ÷ (US$729m - US$131m) (Based on the trailing twelve months to June 2023).
Thus, Gulf Keystone Petroleum has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 11% it's much better.
View our latest analysis for Gulf Keystone Petroleum
Above you can see how the current ROCE for Gulf Keystone Petroleum compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Gulf Keystone Petroleum.
So How Is Gulf Keystone Petroleum's ROCE Trending?
Gulf Keystone Petroleum's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 153% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
In Conclusion...
To bring it all together, Gulf Keystone Petroleum has done well to increase the returns it's generating from its capital employed. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 14% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Gulf Keystone Petroleum does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
