Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Speaking of which, we noticed some great changes in Europa Oil & Gas (Holdings)'s (LON:EOG) returns on capital, so let's have a look.

Understanding 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. Analysts use this formula to calculate it for Europa Oil & Gas (Holdings):

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

0.073 = UK￡1.0m ÷ (UK￡17m - UK￡3.0m) (Based on the trailing twelve months to January 2024).

Thus, Europa Oil & Gas (Holdings) has an ROCE of 7.3%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 9.3%.

See our latest analysis for Europa Oil & Gas (Holdings)

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Europa Oil & Gas (Holdings) has performed in the past in other metrics, you can view this free graph of Europa Oil & Gas (Holdings)'s past earnings, revenue and cash flow.

What Does the ROCE Trend For Europa Oil & Gas (Holdings) Tell Us?

Europa Oil & Gas (Holdings) has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 7.3% on its capital. Not only that, but the company is utilizing 25% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 18% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.