Returns Are Gaining Momentum At Gulf Marine Services (LON:GMS)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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, Gulf Marine Services (LON:GMS) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Gulf Marine Services, this is the formula:

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

0.16 = US$56m ÷ (US$665m - US$306m) (Based on the trailing twelve months to June 2024).

Therefore, Gulf Marine Services has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Energy Services industry average of 10% it's much better.

View our latest analysis for Gulf Marine Services

In the above chart we have measured Gulf Marine Services' 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 Gulf Marine Services for free.

So How Is Gulf Marine Services' ROCE Trending?

Gulf Marine Services' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 186% whilst employing roughly the same amount of capital. 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. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a side note, Gulf Marine Services' current liabilities are still rather high at 46% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Gulf Marine Services' ROCE

To sum it up, Gulf Marine Services is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 124% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Gulf Marine Services can keep these trends up, it could have a bright future ahead.

If you want to know some of the risks facing Gulf Marine Services we've found 4 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.