What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So on that note, California Resources (NYSE:CRC) looks quite promising in regards to its trends of return on capital.
Understanding 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. To calculate this metric for California Resources, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$492m ÷ (US$4.0b - US$616m) (Based on the trailing twelve months to December 2023).
Therefore, California Resources has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 14% generated by the Oil and Gas industry.
Above you can see how the current ROCE for California Resources compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for California Resources .
So How Is California Resources' ROCE Trending?
We're pretty happy with how the ROCE has been trending at California Resources. The data shows that returns on capital have increased by 78% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 48% less capital than it was five years ago. California Resources 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
In summary, it's great to see that California Resources has been able to turn things around and earn higher returns on lower amounts of capital. And a remarkable 142% total return over the last three years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
On a final note, we've found 2 warning signs for California Resources that we think you should be aware of.
While California Resources may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.