What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Jutal Offshore Oil Services (HKG:3303) looks quite promising in regards to its trends of return on capital.
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 Jutal Offshore Oil Services, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = CN¥259m ÷ (CN¥4.5b - CN¥2.0b) (Based on the trailing twelve months to June 2021).
Therefore, Jutal Offshore Oil Services has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Energy Services industry average of 4.1% it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Jutal Offshore Oil Services' ROCE against it's prior returns. If you're interested in investigating Jutal Offshore Oil Services' past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Jutal Offshore Oil Services has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 11% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Jutal Offshore Oil Services is utilizing 101% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 46% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.
The Bottom Line
Long story short, we're delighted to see that Jutal Offshore Oil Services' reinvestment activities have paid off and the company is now profitable. Considering the stock has delivered 2.6% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Jutal Offshore Oil Services does have some risks though, and we've spotted 3 warning signs for Jutal Offshore Oil Services that you might be interested in.
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.
Jutal Offshore Oil Services
Jutal Offshore Oil Services Limited, an investment holding company, engages in the fabrication of facilities and provision of integrated services for oil and gas, new energy, and refining and chemical industries.
Flawless balance sheet and overvalued.