To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. So on that note, ONEOK (NYSE:OKE) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for ONEOK:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.13 = US$2.7b ÷ (US$24b – US$4.1b) (Based on the trailing twelve months to September 2022).
So, ONEOK has an ROCE of 13%. In absolute terms, that’s a pretty standard return but compared to the Oil and Gas industry average it falls behind.
Our analysis indicates that OKE is potentially overvalued!
Above you can see how the current ROCE for ONEOK compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for ONEOK.
So How Is ONEOK’s ROCE Trending?
The trends we’ve noticed at ONEOK are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 45% more capital is being employed now too. So we’re very much inspired by what we’re seeing at ONEOK thanks to its ability to profitably reinvest capital.
The Bottom Line
To sum it up, ONEOK has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 72% to shareholders over the last five years, it’s fair to say investors are beginning to recognize these changes. 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.
If you want to know some of the risks facing ONEOK we’ve found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.
While ONEOK isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Valuation is complex, but we’re helping make it simple.
Find out whether ONEOK is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.