What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Frontera Energy (TSE:FEC), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 Frontera Energy is:

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

0.076 = US$186m ÷ (US$3.0b - US$548m) (Based on the trailing twelve months to June 2024).

So, Frontera Energy has an ROCE of 7.6%. On its own, that's a low figure but it's around the 9.1% average generated by the Oil and Gas industry.

Check out our latest analysis for Frontera Energy

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

So How Is Frontera Energy's ROCE Trending?

When we looked at the ROCE trend at Frontera Energy, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 7.6%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Frontera Energy's ROCE

To conclude, we've found that Frontera Energy is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 26% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

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