Returns On Capital Are Showing Encouraging Signs At Golden Energy Offshore Services (OB:GEOS)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 on that note, Golden Energy Offshore Services (OB:GEOS) looks quite promising in regards to its trends of return on capital.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Golden Energy Offshore Services:

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

0.018 = kr23m ÷ (kr1.6b - kr285m) (Based on the trailing twelve months to December 2023).

Thus, Golden Energy Offshore Services has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 18%.

See our latest analysis for Golden Energy Offshore Services

Historical performance is a great place to start when researching a stock so above you can see the gauge for Golden Energy Offshore Services' ROCE against it's prior returns. If you'd like to look at how Golden Energy Offshore Services has performed in the past in other metrics, you can view this free graph of Golden Energy Offshore Services' past earnings, revenue and cash flow.

The Trend Of ROCE

Golden Energy Offshore Services has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.8% on its capital. Not only that, but the company is utilizing 372% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

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. The current liabilities has increased to 18% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From Golden Energy Offshore Services' ROCE

To the delight of most shareholders, Golden Energy Offshore Services has now broken into profitability. And since the stock has fallen 68% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 4 warning signs with Golden Energy Offshore Services (at least 3 which are potentially serious) , and understanding them would certainly be useful.

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

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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.