STEP Energy Services (TSE:STEP) Is Very Good At Capital Allocation

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at STEP Energy Services' (TSE:STEP) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on STEP Energy Services is:

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

0.22 = CA$111m ÷ (CA$618m - CA$109m) (Based on the trailing twelve months to June 2023).

Therefore, STEP Energy Services has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Energy Services industry average of 12%.

Check out our latest analysis for STEP Energy Services

Above you can see how the current ROCE for STEP Energy Services 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 STEP Energy Services.

What Does the ROCE Trend For STEP Energy Services Tell Us?

STEP Energy Services has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown by 113%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 40% less than it was five years ago, which can be indicative of a business that's improving its efficiency. STEP Energy Services may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

Our Take On STEP Energy Services' ROCE

In the end, STEP Energy Services has proven it's capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 30% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

STEP Energy Services is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.