These Trends Paint A Bright Future For Electromagnetic Geoservices (OB:EMGS)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So when we looked at the ROCE trend of Electromagnetic Geoservices (OB:EMGS) we really liked what we saw.

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)

0.21 = US$9.6m ÷ (US$62m - US$15m) (Based on the trailing twelve months to September 2020).

Therefore, Electromagnetic Geoservices has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 7.3% 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.

What Can We Tell From Electromagnetic Geoservices' ROCE Trend?

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. Additionally, the business is utilizing 48% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Electromagnetic Geoservices could be selling under-performing assets since the ROCE is improving.

One more thing to note, Electromagnetic Geoservices has decreased current liabilities to 24% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line 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. And since the stock has dived 84% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

On a final note, we've found 2 warning signs for Electromagnetic Geoservices that we think you should be aware of.

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.

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