Investors Will Want Solstad Offshore's (OB:SOFF) 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Solstad Offshore (OB:SOFF) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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

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

0.12 = kr838m ÷ (kr8.8b - kr1.6b) (Based on the trailing twelve months to September 2024).

Thus, Solstad Offshore has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Energy Services industry average of 11%.

See our latest analysis for Solstad Offshore

Above you can see how the current ROCE for Solstad 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 analyst report for Solstad Offshore .

What Does the ROCE Trend For Solstad Offshore Tell Us?

The fact that Solstad Offshore is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 12% on its capital. Not only that, but the company is utilizing 155% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 18%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Solstad Offshore has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Solstad Offshore's ROCE

To the delight of most shareholders, Solstad Offshore has now broken into profitability. Although the company may be facing some issues elsewhere since the stock has plunged 95% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

Like most companies, Solstad Offshore does come with some risks, and we've found 2 warning signs that you should be aware of.

While Solstad 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.