Will Murphy Oil's (NYSE:MUR) Growth In ROCE Persist?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Murphy Oil (NYSE:MUR) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Murphy Oil, this is the formula:

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

0.069 = US$709m ÷ (US$11b - US$865m) (Based on the trailing twelve months to June 2020).

Thus, Murphy Oil has an ROCE of 6.9%. In absolute terms, that's a low return but it's around the Oil and Gas industry average of 6.5%.

See our latest analysis for Murphy Oil

In the above chart we have a measured Murphy Oil's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Murphy Oil here for free.

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

You'd find it hard not to be impressed with the ROCE trend at Murphy Oil. The figures show that over the last five years, returns on capital have grown by 38%. The company is now earning US$0.07 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 20% less capital than it was five years ago. Murphy Oil may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

In Conclusion...

In summary, it's great to see that Murphy Oil has been able to turn things around and earn higher returns on lower amounts of capital. Astute investors may have an opportunity here because the stock has declined 48% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to know some of the risks facing Murphy Oil we've found 4 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Murphy Oil isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

This article by Simply Wall St is general in nature. 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.

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