If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Granite Ridge Resources (NYSE:GRNT) and its trend of ROCE, we really liked what we saw.
Understanding 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 Granite Ridge Resources is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$117m ÷ (US$967m - US$66m) (Based on the trailing twelve months to March 2024).
So, Granite Ridge Resources has an ROCE of 13%. By itself that's a normal return on capital and it's in line with the industry's average returns of 13%.
Above you can see how the current ROCE for Granite Ridge Resources compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Granite Ridge Resources .
What Can We Tell From Granite Ridge Resources' ROCE Trend?
The trends we've noticed at Granite Ridge Resources are quite reassuring. The data shows that returns on capital have increased substantially over the last three years to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 246% more capital is being employed now too. So we're very much inspired by what we're seeing at Granite Ridge Resources thanks to its ability to profitably reinvest capital.
Our Take On Granite Ridge Resources' ROCE
All in all, it's terrific to see that Granite Ridge Resources is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 29% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you want to know some of the risks facing Granite Ridge Resources we've found 2 warning signs (1 doesn't sit too well with us!) 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.
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.