Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Murphy Oil (NYSE:MUR) so let's look a bit deeper.
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. To calculate this metric for Murphy Oil, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$949m ÷ (US$9.9b - US$928m) (Based on the trailing twelve months to June 2024).
So, Murphy Oil has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 12% generated by the Oil and Gas industry.
View our latest analysis for Murphy Oil
In the above chart we have measured Murphy Oil'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 Murphy Oil for free.
We're pretty happy with how the ROCE has been trending at Murphy Oil. The data shows that returns on capital have increased by 167% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 21% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Murphy Oil may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
In a nutshell, we're pleased to see that Murphy Oil has been able to generate higher returns from less capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
One more thing to note, we've identified 2 warning signs with Murphy Oil and understanding them should be part of your investment process.
While Murphy Oil isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.