Stock Analysis

We Like These Underlying Return On Capital Trends At Orbit Garant Drilling (TSE:OGD)

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TSX:OGD
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There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Orbit Garant Drilling (TSE:OGD) and its trend of ROCE, we really liked what we saw.

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 Orbit Garant Drilling, this is the formula:

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

0.094 = CA$9.5m ÷ (CA$140m - CA$38m) (Based on the trailing twelve months to March 2023).

So, Orbit Garant Drilling has an ROCE of 9.4%. On its own that's a low return, but compared to the average of 3.7% generated by the Metals and Mining industry, it's much better.

See our latest analysis for Orbit Garant Drilling

roce
TSX:OGD Return on Capital Employed June 7th 2023

Above you can see how the current ROCE for Orbit Garant Drilling compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

SWOT Analysis for Orbit Garant Drilling

Strength
  • Debt is well covered by earnings.
Weakness
  • No major weaknesses identified for OGD.
Opportunity
  • Annual revenue is forecast to grow faster than the Canadian market.
Threat
  • Debt is not well covered by operating cash flow.

So How Is Orbit Garant Drilling's ROCE Trending?

Orbit Garant Drilling has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 923% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In Conclusion...

In summary, we're delighted to see that Orbit Garant Drilling has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 60% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Orbit Garant Drilling does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Valuation is complex, but we're helping make it simple.

Find out whether Orbit Garant Drilling 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.

View the Free Analysis

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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.