Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 Murphy Oil (NYSE:MUR) and its trend of ROCE, we really liked what we saw.

What Is 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. The formula for this calculation on Murphy Oil is:

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).

Thus, 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.

Above you can see how the current ROCE for Murphy Oil 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 analyst report for Murphy Oil .

So How Is Murphy Oil's ROCE Trending?

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. The company is now earning US$0.1 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 21% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

The Key Takeaway

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. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we've found 2 warning signs for Murphy Oil that we think you should be aware of.

While Murphy Oil may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.