If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after briefly looking over the numbers, we don't think Ocean Yield (OB:OCY) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Ocean Yield:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = US$181m ÷ (US$2.5b - US$366m) (Based on the trailing twelve months to September 2020).
Therefore, Ocean Yield has an ROCE of 8.4%. In absolute terms, that's a low return, but it's much better than the Energy Services industry average of 4.7%.
Above you can see how the current ROCE for Ocean Yield compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ocean Yield here for free.
What Does the ROCE Trend For Ocean Yield Tell Us?
There are better returns on capital out there than what we're seeing at Ocean Yield. The company has employed 22% more capital in the last five years, and the returns on that capital have remained stable at 8.4%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
Our Take On Ocean Yield's ROCE
As we've seen above, Ocean Yield's returns on capital haven't increased but it is reinvesting in the business. Since the stock has declined 44% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
If you want to know some of the risks facing Ocean Yield we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.
While Ocean Yield 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. 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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