There's Been No Shortage Of Growth Recently For ABS Marine Services' (NSE:ABSMARINE) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at ABS Marine Services (NSE:ABSMARINE) and its trend of ROCE, we really liked what we saw.

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What Is 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 ABS Marine Services, this is the formula:

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

0.18 = ₹284m ÷ (₹1.8b - ₹304m) (Based on the trailing twelve months to March 2024).

Thus, ABS Marine Services has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 15% generated by the Infrastructure industry.

See our latest analysis for ABS Marine Services

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of ABS Marine Services.

What The Trend Of ROCE Can Tell Us

We're delighted to see that ABS Marine Services is reaping rewards from its investments and has now broken into profitability. The company now earns 18% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

What We Can Learn From ABS Marine Services' ROCE

To sum it up, ABS Marine Services is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 40% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 2 warning signs with ABS Marine Services (at least 1 which is concerning) , and understanding these would certainly be useful.

While ABS Marine Services may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.