Orbit Garant Drilling (TSE:OGD) Is Looking To Continue Growing Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Orbit Garant Drilling's (TSE:OGD) returns on capital, so let's have 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. To calculate this metric for Orbit Garant Drilling, this is the formula:

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

0.016 = CA$1.6m ÷ (CA$142m - CA$41m) (Based on the trailing twelve months to September 2022).

So, Orbit Garant Drilling has an ROCE of 1.6%. On its own that's a low return, but compared to the average of 1.2% generated by the Metals and Mining industry, it's much better.

See our latest analysis for Orbit Garant Drilling

In the above chart we have measured Orbit Garant 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 Orbit Garant Drilling here for free.

What Does the ROCE Trend For Orbit Garant Drilling Tell Us?

The fact that Orbit Garant Drilling is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 1.6% on its capital. In addition to that, Orbit Garant Drilling is employing 29% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Key Takeaway

Long story short, we're delighted to see that Orbit Garant Drilling's reinvestment activities have paid off and the company is now profitable. Although the company may be facing some issues elsewhere since the stock has plunged 79% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

If you want to know some of the risks facing Orbit Garant Drilling we've found 4 warning signs (2 are potentially serious!) that you should be aware of before investing here.

While Orbit Garant Drilling isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.