If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Europa Oil & Gas (Holdings) (LON:EOG) looks quite promising in regards to its trends of return on capital.

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 Europa Oil & Gas (Holdings) is:

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

0.074 = UK￡1.1m ÷ (UK￡16m - UK￡781k) (Based on the trailing twelve months to July 2023).

Therefore, Europa Oil & Gas (Holdings) has an ROCE of 7.4%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 10%.

Check out 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?

The fact that Europa Oil & Gas (Holdings) is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 7.4% which is a sight for sore eyes. In addition to that, Europa Oil & Gas (Holdings) is employing 96% more capital than previously which is expected of a company that's 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.

What We Can Learn From Europa Oil & Gas (Holdings)'s ROCE

Overall, Europa Oil & Gas (Holdings) gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And since the stock has fallen 67% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.