SBM Offshore's (AMS:SBMO) Returns On Capital Are Heading Higher

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So when we looked at SBM Offshore (AMS:SBMO) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for SBM Offshore:

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

0.08 = US$685m ÷ (US$11b - US$2.6b) (Based on the trailing twelve months to December 2020).

So, SBM Offshore has an ROCE of 8.0%. In absolute terms, that's a low return, but it's much better than the Energy Services industry average of 4.9%.

See our latest analysis for SBM Offshore

Above you can see how the current ROCE for SBM Offshore compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For SBM Offshore Tell Us?

SBM Offshore has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 31% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

In Conclusion...

To bring it all together, SBM Offshore has done well to increase the returns it's generating from its capital employed. Since the stock has returned a solid 56% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if SBM Offshore can keep these trends up, it could have a bright future ahead.

SBM Offshore does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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