If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Ithaca Energy's (LON:ITH) look very promising so lets take a look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Ithaca Energy, this is the formula:

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

0.22 = US$1.2b ÷ (US$6.4b - US$975m) (Based on the trailing twelve months to June 2023).

Therefore, Ithaca Energy has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 11%.

View our latest analysis for Ithaca Energy  roce

In the above chart we have measured Ithaca Energy's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our freereport for Ithaca Energy.

So How Is Ithaca Energy's ROCE Trending?

The fact that Ithaca Energy is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 22% on its capital. And unsurprisingly, like most companies trying to break into the black, Ithaca Energy is utilizing 301% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.



On a related note, the company's ratio of current liabilities to total assets has decreased to 15%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Ithaca Energy has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

To the delight of most shareholders, Ithaca Energy has now broken into profitability. Given the stock has declined 22% in the last year, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we've found  1 warning sign for Ithaca Energy that we think you should be aware of.

If you'd like to see other companies earning high returns, check out our freelist of companies earning high returns with solid balance sheets here.

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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.