Stock Analysis

Oceaneering International (NYSE:OII) Will Be Hoping To Turn Its Returns On Capital Around

NYSE:OII
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When researching a stock for investment, what can tell us that the company is 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 to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Oceaneering International (NYSE:OII), 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 Oceaneering International, this is the formula:

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

0.012 = US$19m ÷ (US$2.1b - US$480m) (Based on the trailing twelve months to June 2021).

Thus, Oceaneering International has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 5.3%.

Check out our latest analysis for Oceaneering International

roce
NYSE:OII Return on Capital Employed August 5th 2021

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.

What Does the ROCE Trend For Oceaneering International Tell Us?

In terms of Oceaneering International's historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 10% five years ago but has since fallen to 1.2%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 44% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. 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.

In Conclusion...

To see Oceaneering International 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 55% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 3 warning signs with Oceaneering International and understanding them should be part of your investment process.

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. 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.
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