Returns On Capital At Shelf Drilling (OB:SHLF) Paint A Concerning Picture

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Shelf Drilling (OB:SHLF), the trends above didn't look too great.

Understanding 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. Analysts use this formula to calculate it for Shelf Drilling:

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

0.061 = US$83m ÷ (US$1.5b - US$147m) (Based on the trailing twelve months to December 2020).

Therefore, Shelf Drilling has an ROCE of 6.1%. On its own, that's a low figure but it's around the 5.5% average generated by the Energy Services industry.

Check out our latest analysis for Shelf Drilling

Above you can see how the current ROCE for Shelf Drilling 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.

So How Is Shelf Drilling's ROCE Trending?

We are a bit worried about the trend of returns on capital at Shelf Drilling. Unfortunately the returns on capital have diminished from the 14% 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Shelf Drilling to turn into a multi-bagger.

The Bottom Line On Shelf Drilling's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. We expect this has contributed to the stock plummeting 92% during the last three years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

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

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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