Geospace Technologies (NASDAQ:GEOS) Shareholders Will Want The ROCE Trajectory To Continue

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 Geospace Technologies (NASDAQ:GEOS) so let's look a bit deeper.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Geospace Technologies is:

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

0.02 = US$2.6m ÷ (US$146m - US$16m) (Based on the trailing twelve months to June 2023).

So, Geospace Technologies has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 12%.

View our latest analysis for Geospace Technologies

Historical performance is a great place to start when researching a stock so above you can see the gauge for Geospace Technologies' ROCE against it's prior returns. If you'd like to look at how Geospace Technologies has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Geospace Technologies' ROCE Trending?

We're delighted to see that Geospace Technologies 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 2.0% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 27%. Geospace Technologies could be selling under-performing assets since the ROCE is improving.

What We Can Learn From Geospace Technologies' ROCE

In the end, Geospace Technologies has proven it's capital allocation skills are good with those higher returns from less amount of capital. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.