We Like These Underlying Return On Capital Trends 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? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Gulf Marine Services' (LON:GMS) returns on capital, so let's have a look.

What Is 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 Gulf Marine Services, this is the formula:

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

0.083 = US$47m ÷ (US$649m - US$89m) (Based on the trailing twelve months to June 2023).

Thus, Gulf Marine Services has an ROCE of 8.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.2%.

View our latest analysis for Gulf Marine Services

Above you can see how the current ROCE for Gulf Marine Services compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Gulf Marine Services here for free.

What Can We Tell From Gulf Marine Services' ROCE Trend?

You'd find it hard not to be impressed with the ROCE trend at Gulf Marine Services. The data shows that returns on capital have increased by 239% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 32% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Gulf Marine 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 Gulf Marine Services' ROCE

In the end, Gulf Marine Services has proven it's capital allocation skills are good with those higher returns from less amount of capital. However the stock is down a substantial 75% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

On a final note, we found 4 warning signs for Gulf Marine Services (1 is a bit concerning) you should be aware of.

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.

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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.