Borr Drilling (OB:BORR) Is Looking To Continue Growing Its Returns On Capital

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 on that note, Borr Drilling (OB:BORR) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Borr Drilling is:

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

0.092 = US$250m ÷ (US$3.1b - US$360m) (Based on the trailing twelve months to December 2023).

So, Borr Drilling has an ROCE of 9.2%. In absolute terms, that's a low return but it's around the Energy Services industry average of 9.6%.

See our latest analysis for Borr Drilling

Above you can see how the current ROCE for Borr Drilling 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 analyst report for Borr Drilling .

How Are Returns Trending?

Shareholders will be relieved that Borr Drilling has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 9.2% on its capital. 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. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

The Key Takeaway

To sum it up, Borr Drilling is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has dived 71% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

One more thing to note, we've identified 1 warning sign with Borr Drilling and understanding this should be part of your investment process.

While Borr Drilling 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.