Shelf Drilling (OB:SHLF) May Have Issues Allocating Its Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Shelf Drilling (OB:SHLF), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What is it?

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)

0.031 = US$46m ÷ (US$1.6b - US$142m) (Based on the trailing twelve months to June 2021).

Therefore, Shelf Drilling has an ROCE of 3.1%. On its own that's a low return, but compared to the average of 2.2% generated by the Energy Services industry, it's much better.

See our latest analysis for Shelf Drilling

In the above chart we have measured Shelf Drilling's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Shelf Drilling.

How Are Returns 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 11% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Shelf Drilling becoming one if things continue as they have.

Our Take 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. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Shelf Drilling does have some risks though, and we've spotted 3 warning signs for Shelf Drilling that you might be interested in.

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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.
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