Stock Analysis

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

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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. And in light of that, the trends we're seeing at Electromagnetic Geoservices' (OB:EMGS) look very promising so lets take a look.

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. Analysts use this formula to calculate it for Electromagnetic Geoservices:

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

0.46 = US$13m ÷ (US$43m - US$14m) (Based on the trailing twelve months to December 2022).

Thus, Electromagnetic Geoservices has an ROCE of 46%. In absolute terms that's a great return and it's even better than the Energy Services industry average of 7.1%.

See our latest analysis for Electromagnetic Geoservices

OB:EMGS Return on Capital Employed March 15th 2023

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'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.

So How Is Electromagnetic Geoservices' ROCE Trending?

It's great to see that Electromagnetic Geoservices has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. 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 65%. Electromagnetic Geoservices could be selling under-performing assets since the ROCE is improving.

Our Take On Electromagnetic Geoservices' ROCE

In summary, it's great to see that Electromagnetic Geoservices has been able to turn things around and earn higher returns on lower amounts of capital. Considering the stock has delivered 25% 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 with that in mind, we think the stock deserves further research.

One more thing: We've identified 3 warning signs with Electromagnetic Geoservices (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

Electromagnetic Geoservices is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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