Investors Will Want Siem Offshore's (OB:SIOFF) Growth In ROCE To Persist

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Speaking of which, we noticed some great changes in Siem Offshore's (OB:SIOFF) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Siem Offshore:

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

0.047 = US$43m ÷ (US$1.0b - US$114m) (Based on the trailing twelve months to September 2022).

Therefore, Siem Offshore has an ROCE of 4.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.3%.

Our analysis indicates that SIOFF is potentially undervalued!

Historical performance is a great place to start when researching a stock so above you can see the gauge for Siem Offshore's ROCE against it's prior returns. If you're interested in investigating Siem Offshore's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

While the ROCE is still rather low for Siem Offshore, we're glad to see it heading in the right direction. We found that the returns on capital employed over the last five years have risen by 514%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 53% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Siem Offshore may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Bottom Line

In the end, Siem Offshore has proven it's capital allocation skills are good with those higher returns from less amount of capital. Although the company may be facing some issues elsewhere since the stock has plunged 95% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Siem Offshore does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

While Siem Offshore 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. 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.