Seamec's (NSE:SEAMECLTD) Returns On Capital Are Heading Higher

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Speaking of which, we noticed some great changes in Seamec's (NSE:SEAMECLTD) returns on capital, so let's have a look.

Understanding 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 Seamec, this is the formula:

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

0.078 = ₹650m ÷ (₹9.4b - ₹1.1b) (Based on the trailing twelve months to December 2021).

Thus, Seamec has an ROCE of 7.8%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 16%.

See our latest analysis for Seamec

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're interested in investigating Seamec's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Seamec Tell Us?

The fact that Seamec is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 7.8% which is a sight for sore eyes. Not only that, but the company is utilizing 100% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 12%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

In summary, it's great to see that Seamec has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Seamec can keep these trends up, it could have a bright future ahead.

Seamec does have some risks though, and we've spotted 2 warning signs for Seamec that you might be interested in.

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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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.