Electromagnetic Geoservices (OB:EMGS) Is Achieving High Returns On Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Electromagnetic Geoservices (OB:EMGS) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Electromagnetic Geoservices, this is the formula:

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

0.34 = US$9.2m ÷ (US$40m - US$13m) (Based on the trailing twelve months to December 2021).

So, Electromagnetic Geoservices has an ROCE of 34%. That's a fantastic return and not only that, it outpaces the average of 5.5% earned by companies in a similar industry.

See our latest analysis for Electromagnetic Geoservices

Historical performance is a great place to start when researching a stock so above you can see the gauge for Electromagnetic Geoservices' ROCE against it's prior returns. If you'd like to look at how Electromagnetic Geoservices 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 Electromagnetic Geoservices' ROCE Trend?

We're delighted to see that Electromagnetic Geoservices is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 34% which is no doubt a relief for some early shareholders. In regards to capital employed, Electromagnetic Geoservices is using 69% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 33% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

In Conclusion...

In a nutshell, we're pleased to see that Electromagnetic Geoservices has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 59% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 5 warning signs with Electromagnetic Geoservices (at least 2 which are potentially serious) , and understanding these would certainly be useful.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.