Electromagnetic Geoservices (OB:EMGS) Is Very Good At Capital Allocation

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at Electromagnetic Geoservices' (OB:EMGS) look very promising so lets take 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. Analysts use this formula to calculate it for Electromagnetic Geoservices:

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

0.42 = US$13m ÷ (US$44m - US$13m) (Based on the trailing twelve months to June 2022).

Therefore, Electromagnetic Geoservices has an ROCE of 42%. In absolute terms that's a great return and it's even better than the Energy Services industry average of 4.5%.

Check out our latest analysis for Electromagnetic Geoservices

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, revenue and cash flow of Electromagnetic Geoservices, check out these free graphs here.

How Are Returns Trending?

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 42% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 58%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

The Bottom Line

From what we've seen above, Electromagnetic Geoservices has managed to increase it's returns on capital all the while reducing it's capital base. Considering the stock has delivered 5.1% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing to note, we've identified 4 warning signs with Electromagnetic Geoservices and understanding them should be part of your investment process.

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.