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Ithaca Energy (LON:ITH) Return Trends Look Promising
What trends should we look for if we want to identify stocks that could multiply in value over the long term? In a perfect world, we would like to see a company investing more capital into its business and, ideally, the returns made on that capital would also increase. Simply put, these types of businesses are compounding machines, meaning they continually reinvest their profits at increasingly higher rates of return. With that in mind, we noticed some promising trends in Energy of Ithaca (LON:ITH) so let’s look a little deeper.
What is return on capital employed (ROCE)?
For those who don’t know, ROCE is a measure of a company’s annual pretax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Ithaca Energy:
Return on capital employed = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.071 = $370M ÷ ($6.2B – $1.1B) (Based on trailing twelve months to December 2023).
Then, Ithaca Energy has an ROCE of 7.1%. In absolute terms, this is a low return and also lower than the Oil and Gas industry average of 10%.
See our latest analysis for Ithaca Energy
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In the chart above we measure Ithaca Energy’s past ROCE against its past performance, but the future is arguably more important. If you want, you can Check out the forecasts from analysts who cover Ithaca Energy for free.
The ROCE trend
We’re happy to see that ROCE is moving in the right direction, even if it’s still low at the moment. Data shows that return on capital has increased substantially over the past five years, to 7.1%. The amount of capital employed also increased, by 167%. This may indicate that there are many opportunities to invest capital internally and at increasingly higher rates, a common combination among multi-baggers.
What We Can Learn from Ithaca Energy’s ROCE
In short, Ithaca Energy has proven that it can reinvest in the business and generate higher returns on capital employed, which is fantastic. Astute investors may have an opportunity here because the stock is down 14% in the last year. With this in mind, we believe promising trends warrant this action for further investigation.
If you’d like to know about the risks Ithaca Energy faces, we’ve found out 2 warning signs that you should be aware of.
For those who like to invest solid companies, Look this free list of companies with strong balance sheets and high returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St has no position in any of the stocks mentioned.