If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Seamec (NSE:SEAMECLTD) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
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. The formula for this calculation on Seamec is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = ₹208m ÷ (₹8.4b - ₹1.7b) (Based on the trailing twelve months to December 2020).
So, Seamec has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 16%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Seamec's ROCE against it's prior returns. If you'd like to look at how Seamec has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Seamec's ROCE Trend?
Seamec has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 3.1% on its capital. And unsurprisingly, like most companies trying to break into the black, Seamec is utilizing 23% 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.
Our Take On Seamec's ROCE
Long story short, we're delighted to see that Seamec's reinvestment activities have paid off and the company is now profitable. And a remarkable 449% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing, we've spotted 1 warning sign facing Seamec that you might find interesting.
While Seamec isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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