The Trend Of High Returns At Reach Subsea (OB:REACH) Has Us Very Interested

There are a few key trends to look for if we want to identify the next multi-bagger. 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. With that in mind, the ROCE of Reach Subsea (OB:REACH) looks great, so lets see what the trend can tell us.

What is 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. To calculate this metric for Reach Subsea, this is the formula:

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

0.32 = kr79m ÷ (kr508m - kr259m) (Based on the trailing twelve months to March 2021).

Thus, Reach Subsea has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Energy Services industry average of 2.2%.

See 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.

So How Is Reach Subsea's ROCE Trending?

Reach Subsea is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 858% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

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 51% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Reach Subsea's ROCE

To bring it all together, Reach Subsea has done well to increase the returns it's generating from its capital employed. And with a respectable 81% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing Reach Subsea, we've discovered 3 warning signs that you should be aware of.

Reach Subsea is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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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