Is Odfjell Drilling (OB:ODL) Struggling?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Odfjell Drilling (OB:ODL), so let's see why.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Odfjell Drilling is:

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

0.058 = US$130m ÷ (US$2.6b - US$382m) (Based on the trailing twelve months to September 2020).

Therefore, Odfjell Drilling has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 7.3%.

See our latest analysis for Odfjell Drilling

Above you can see how the current ROCE for Odfjell Drilling 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 Odfjell Drilling here for free.

What Can We Tell From Odfjell Drilling's ROCE Trend?

In terms of Odfjell Drilling's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 9.8% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Odfjell Drilling becoming one if things continue as they have.

The Bottom Line On Odfjell Drilling's ROCE

In summary, it's unfortunate that Odfjell Drilling is generating lower returns from the same amount of capital. Since the stock has skyrocketed 253% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Odfjell Drilling (including 2 which are potentially serious) .

While Odfjell Drilling may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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