There's Been No Shortage Of Growth Recently For Electromagnetic Geoservices' (OB:EMGS) 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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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, we've noticed some promising trends at Electromagnetic Geoservices (OB:EMGS) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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)

0.16 = US$3.9m ÷ (US$31m - US$7.5m) (Based on the trailing twelve months to September 2023).

Thus, Electromagnetic Geoservices has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Energy Services industry average of 9.5% it's much better.

Check out 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're interested in investigating Electromagnetic Geoservices' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Electromagnetic Geoservices' ROCE Trending?

We're delighted to see that Electromagnetic Geoservices is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Electromagnetic Geoservices is using 61% 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. Electromagnetic Geoservices could be selling under-performing assets since the ROCE is improving.

Our Take On Electromagnetic Geoservices' ROCE

In the end, Electromagnetic Geoservices has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has only returned 2.6% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you'd like to know more about Electromagnetic Geoservices, we've spotted 4 warning signs, and 1 of them can't be ignored.

While Electromagnetic Geoservices isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.