What These Trends Mean At Siem Offshore (OB:SIOFF)

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Siem Offshore (OB:SIOFF), so let's see why.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Siem Offshore, this is the formula:

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

0.018 = US$17m ÷ (US$1.2b - US$277m) (Based on the trailing twelve months to September 2020).

Therefore, Siem Offshore has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 7.3%.

View our latest analysis for Siem Offshore

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Siem Offshore has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Siem Offshore's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 1.8% we see today. In addition to that, Siem Offshore is now employing 52% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 23%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line

To see Siem Offshore reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors haven't taken kindly to these developments, since the stock has declined 44% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Siem Offshore (1 shouldn't be ignored) you should be aware of.

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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