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

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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)

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. 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)

0.41 = US$12m ÷ (US$39m - US$10m) (Based on the trailing twelve months to March 2023).

Therefore, Electromagnetic Geoservices has an ROCE of 41%. That's a fantastic return and not only that, it outpaces the average of 8.1% 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'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?

Like most people, we're pleased that Electromagnetic Geoservices is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 41% on their capital employed. In regards to capital employed, Electromagnetic Geoservices is using 58% 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.

The Bottom Line

In the end, Electromagnetic Geoservices has proven it's capital allocation skills are good with those higher returns from less amount of capital. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know about the risks facing Electromagnetic Geoservices, we've discovered 3 warning signs that you should be aware of.

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.