Investors Shouldn't Overlook Electromagnetic Geoservices' (OB:EMGS) Impressive Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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 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 Electromagnetic Geoservices:

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

0.23 = US$7.1m ÷ (US$47m - US$15m) (Based on the trailing twelve months to September 2021).

So, Electromagnetic Geoservices has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 6.0% earned by companies in a similar industry.

View 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 want to delve into the historical earnings, revenue and cash flow of Electromagnetic Geoservices, check out these free graphs here.

The Trend Of ROCE

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 23% 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 70%. Electromagnetic Geoservices could be selling under-performing assets since the ROCE is improving.

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. Effectively this means that suppliers or short-term creditors are now funding 33% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Key Takeaway

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 58% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to know some of the risks facing Electromagnetic Geoservices we've found 5 warning signs (2 are concerning!) that you should be aware of before investing here.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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.

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