If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Bass Oil (ASX:BAS), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Bass Oil:

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

0.051 = US$514k ÷ (US$12m - US$1.5m) (Based on the trailing twelve months to June 2024).

Thus, Bass Oil has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 9.1%.

See our latest analysis for Bass Oil

Historical performance is a great place to start when researching a stock so above you can see the gauge for Bass Oil's ROCE against it's prior returns. If you're interested in investigating Bass Oil's past further, check out this free graph covering Bass Oil's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Bass Oil's ROCE has reduced by 84% over the last five years, while the business employed 743% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Bass Oil's earnings and if they change as a result from the capital raise.

On a side note, Bass Oil has done well to pay down its current liabilities to 13% of total assets. Considering it used to be 68%, that's a huge drop in that ratio and it would explain the decline in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

To conclude, we've found that Bass Oil is reinvesting in the business, but returns have been falling.

If you want to continue researching Bass Oil, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Bass Oil 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.