Yield Trends at Africa Oil (TSE:AOI) Look Promising

by MMC
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What trends should we look for if we want to identify stocks whose value can multiply over the long term? Among other things, we will want to see two things; first, growth back on capital employed (ROCE) and on the other hand, an expansion of Rising capital employed. If you see this, it usually means this is a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we’ve noticed big changes in Africa Oil’s (TSE:AOI) capital returns, so let’s take a look.

What is return on capital employed (ROCE)?

If you’ve never worked with ROCE before, it measures the “return” (pre-tax profit) that a company generates from the capital employed in its business. The formula for this calculation on Africa Oil is:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.092 = US$87 million ÷ (US$966 million – US$22 million) (Based on the last twelve months to December 2023).

So, Africa Oil has an ROCE of 9.2%. In absolute terms this is a low yield, but it is around the oil and gas sector average of 9.7%.

Check out our latest analysis for Africa Oil



In the chart above, we measured Africa Oil’s past ROCE against its past performance, but the future is arguably more important. If you are interested, you can view analyst forecasts in our free analyst report for Africa Oil .

The ROCE trend

We are delighted to see that Africa Oil is reaping the benefits of its investments and has now managed to become profitable. The company now earns 9.2% on its capital, after making losses five years ago. Interestingly, the capital employed by the company has remained relatively stable, so these higher returns come either from previous investments that paid off or from increased efficiency. With no notable increase in capital employed, it’s worth finding out what the company plans to do in the future in terms of reinvestment and business growth. After all, a company can only become a long-term multi-bagger if it continually reinvests in itself at high rates of return.

Africa Oil’s net ROCE result

As noted above, Africa Oil appears to be becoming increasingly efficient at generating returns as capital employed has remained stable but earnings (before interest and taxes) are increasing. And with a respectable 91% attributed to those who have held the stock over the past five years, it could be argued that these developments are starting to receive the attention they deserve. Given that the stock has proven to exhibit promising trends, it’s worth researching the company further to see if these trends are likely to persist.

One more thing we spotted 3 warning signs facing Africa Oil that you might find interesting.

For those who like to invest in solid businesses, Look at this free list of companies with strong balance sheets and high returns on equity.

Any feedback on this article? Worried about the content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to constitute financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or your financial situation. Our goal is to provide you with targeted, long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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