The Return Trends At AKITA Drilling (TSE:AKT.A) Look Promising

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in AKITA Drilling's (TSE:AKT.A) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for AKITA Drilling, this is the formula:

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

0.098 = CA$23m ÷ (CA$267m - CA$29m) (Based on the trailing twelve months to September 2023).

Thus, AKITA Drilling has an ROCE of 9.8%. On its own, that's a low figure but it's around the 12% average generated by the Energy Services industry.

See our latest analysis for AKITA Drilling

In the above chart we have measured AKITA Drilling's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering AKITA Drilling here for free.

The Trend Of ROCE

Like most people, we're pleased that AKITA Drilling is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 9.8% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 35%. This could potentially mean that the company is selling some of its assets.

Our Take On AKITA Drilling's ROCE

In a nutshell, we're pleased to see that AKITA Drilling has been able to generate higher returns from less capital. Given the stock has declined 65% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

AKITA Drilling does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

While AKITA Drilling 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.