Returns On Capital Are Showing Encouraging Signs At Siem Offshore (OB:SIOFF)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Siem Offshore (OB:SIOFF) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Siem Offshore is:

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

0.03 = US$30m ÷ (US$1.1b - US$94m) (Based on the trailing twelve months to September 2021).

So, Siem Offshore has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 6.0%.

See our latest analysis for Siem Offshore

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.

The Trend Of ROCE

We're delighted to see that Siem Offshore is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 3.0% on their capital employed. In regards to capital employed, Siem Offshore is using 52% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

What We Can Learn From Siem Offshore's ROCE

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 98% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

Siem Offshore does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are a bit unpleasant...

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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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.