Shelf Drilling (North Sea)'s (OB:SDNS) Returns Have Hit A Wall

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Shelf Drilling (North Sea) (OB:SDNS), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Shelf Drilling (North Sea), this is the formula:

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

0.065 = US$29m ÷ (US$494m - US$45m) (Based on the trailing twelve months to September 2023).

Therefore, Shelf Drilling (North Sea) has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 12%.

Check out our latest analysis for Shelf Drilling (North Sea)

Above you can see how the current ROCE for Shelf Drilling (North Sea) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shelf Drilling (North Sea).

The Trend Of ROCE

Things have been pretty stable at Shelf Drilling (North Sea), with its capital employed and returns on that capital staying somewhat the same for the last . Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Shelf Drilling (North Sea) to be a multi-bagger going forward.

The Bottom Line

In summary, Shelf Drilling (North Sea) isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 48% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Shelf Drilling (North Sea) does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

While Shelf Drilling (North Sea) 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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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.