What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Siem Offshore (OB:SIOFF) so let's look a bit deeper.
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)
0.067 = US$59m ÷ (US$1.0b - US$148m) (Based on the trailing twelve months to March 2023).
Therefore, Siem Offshore has an ROCE of 6.7%. In absolute terms, that's a low return but it's around the Energy Services industry average of 8.1%.
Check out our latest analysis for Siem Offshore
Above you can see how the current ROCE for Siem Offshore compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
We're pretty happy with how the ROCE has been trending at Siem Offshore. The data shows that returns on capital have increased by 1,034% over the trailing five years. 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 48% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
The Bottom Line On Siem Offshore's ROCE
From what we've seen above, Siem Offshore has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has dived 88% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
If you'd like to know more about Siem Offshore, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.
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.
About OB:SEA1
Sea1 Offshore
Owns and operates offshore support vessels for the offshore energy service industry and offshore renewables market.
Very undervalued with solid track record and pays a dividend.