Stock Analysis

Oceaneering International (NYSE:OII) Might Have The Makings Of A Multi-Bagger

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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Oceaneering International (NYSE:OII) 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. Analysts use this formula to calculate it for Oceaneering International:

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

0.04 = US$56m ÷ (US$1.9b - US$516m) (Based on the trailing twelve months to September 2022).

Therefore, Oceaneering International has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 5.8%.

See our latest analysis for Oceaneering International

NYSE:OII Return on Capital Employed November 18th 2022

In the above chart we have measured Oceaneering International's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Oceaneering International here for free.

The Trend Of ROCE

While the ROCE is still rather low for Oceaneering International, we're glad to see it heading in the right direction. We found that the returns on capital employed over the last five years have risen by 334%. The company is now earning US$0.04 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 48% less capital than it was five years ago. Oceaneering International may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

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 Bottom Line

In summary, it's great to see that Oceaneering International has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 19% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

While Oceaneering International looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether OII is currently trading for a fair price.

While Oceaneering International may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Valuation is complex, but we're helping make it simple.

Find out whether Oceaneering International is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.