If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Horizon Oil's (ASX:HZN) look very promising so lets take a look.

Return On Capital Employed (ROCE): What Is It?

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 Horizon Oil is:

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

0.35 = US$50m ÷ (US$201m - US$59m) (Based on the trailing twelve months to December 2022).

Thus, Horizon Oil has an ROCE of 35%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 14%.

See our latest analysis for Horizon Oil

Historical performance is a great place to start when researching a stock so above you can see the gauge for Horizon Oil's ROCE against it's prior returns. If you're interested in investigating Horizon Oil's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Horizon Oil's ROCE Trend?

Horizon Oil has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 284% over the trailing five years. The company is now earning US$0.4 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 36% less capital than it was five years ago. Horizon Oil may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Key Takeaway

From what we've seen above, Horizon Oil has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a staggering 139% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 1 warning sign facing Horizon Oil that you might find interesting.

Horizon Oil is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.