Capital returns show encouraging signs at Karoon Energy (ASX:KAR)

If we want to find a potential multi-bagger, there are often underlying trends that can provide clues. Among other things, we will want to see two things; first, growth to return to on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. Speaking of which, we’ve noticed big changes in Karoon Energy (ASX:KAR) returns to capital, so let’s take a look.

What is return on capital employed (ROCE)?

If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. The formula for this calculation on Karoon Energy is:

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

0.11 = $105 million ÷ ($1.1 billion – $129 million) (Based on the last twelve months to December 2021).

So, Karoon Energy has a ROCE of 11%. That’s a relatively normal return on capital, and it’s around the 12% generated by the oil and gas industry.

See our latest analysis for Karoon Energy

Above, you can see how Karoon Energy’s current ROCE compares to its past returns on capital, but you can’t tell much about the past. If you want, you can check out analyst forecasts covering Karoon Energy here for free.

So, what is the ROCE trend of Karoon Energy?

The fact that Karoon Energy is now generating pre-tax profits on its past investments is very encouraging. The shareholders would no doubt be delighted because the company was loss-making five years ago but now generates 11% of its capital. And unsurprisingly, like most companies trying to break into the dark, Karoon Energy is using 49% more capital than five years ago. This may indicate that there are many opportunities to invest capital internally and at ever higher rates, two common characteristics of a multi-bagger.

The story continues

Our view on Karoon Energy’s ROCE

Overall, Karoon Energy is getting a big boost from us thanks in large part to the fact that they are now profitable and reinvesting in their business. And investors seem to expect more in the future, as the stock has rewarded shareholders with a 61% return over the past five years. So given that the stock has proven to have some promising trends, it’s worth researching the company further to see if those trends are likely to persist.

While Karoon Energy sounds impressive, no company is worth an infinite price. The intrinsic value infographic of our free The research report visualizes whether KAR is currently trading at a fair price.

Although Karoon Energy does not generate the highest yield, check out this free list of companies that achieve high returns on equity with strong balance sheets.

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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 be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.