Can Reach Subsea (OB:REACH) Continue To Grow Its 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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 Reach Subsea (OB:REACH) so let's look a bit deeper.

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. The formula for this calculation on Reach Subsea is:

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

0.12 = kr25m ÷ (kr388m - kr176m) (Based on the trailing twelve months to September 2020).

Thus, Reach Subsea has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.3% generated by the Energy Services industry.

Check out our latest analysis for Reach Subsea

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

What Does the ROCE Trend For Reach Subsea Tell Us?

Reach Subsea's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 243% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, Reach Subsea's current liabilities are still rather high at 45% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Reach Subsea's ROCE

As discussed above, Reach Subsea appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a solid 79% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Reach Subsea can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 3 warning signs with Reach Subsea and understanding them should be part of your investment process.

While Reach Subsea 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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