Siem Offshore's (OB:SIOFF) Returns On Capital Are Heading Higher

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Siem Offshore (OB:SIOFF) and its trend of ROCE, we really liked what we saw.

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

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. The formula for this calculation on Siem Offshore is:

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

0.0084 = US$7.3m ÷ (US$1.2b - US$320m) (Based on the trailing twelve months to December 2020).

Therefore, Siem Offshore has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 5.5%.

Check out 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 want to delve into the historical earnings, revenue and cash flow of Siem Offshore, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

While the ROCE is still rather low for Siem Offshore, we're glad to see it heading in the right direction. The figures show that over the last five years, returns on capital have grown by 236%. The company is now earning US$0.008 per dollar of capital employed. In regards to capital employed, Siem Offshore appears to been achieving more with less, since the business is using 52% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 27% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

In summary, it's great to see that Siem Offshore has been able to turn things around and earn higher returns on lower amounts of capital. Astute investors may have an opportunity here because the stock has declined 66% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we found 3 warning signs for Siem Offshore (1 makes us a bit uncomfortable) 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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This article by Simply Wall St is general in nature. 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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