Stock Analysis

Returns On Capital Are Showing Encouraging Signs At Oceaneering International (NYSE:OII)

NYSE:OII
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Oceaneering International (NYSE:OII) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)

0.094 = US$139m ÷ (US$2.0b - US$575m) (Based on the trailing twelve months to March 2023).

So, Oceaneering International has an ROCE of 9.4%. On its own, that's a low figure but it's around the 9.7% average generated by the Energy Services industry.

Check out our latest analysis for Oceaneering International

roce
NYSE:OII Return on Capital Employed July 21st 2023

Above you can see how the current ROCE for Oceaneering International compares to its prior returns on capital, but there's only so much you can tell from the past. 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?

It's great to see that Oceaneering International has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 9.4% which is no doubt a relief for some early shareholders. In regards to capital employed, Oceaneering International is using 43% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

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 28% 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.

What We Can Learn From Oceaneering International's ROCE

From what we've seen above, Oceaneering International has managed to increase it's returns on capital all the while reducing it's capital base. Astute investors may have an opportunity here because the stock has declined 11% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a separate note, we've found 1 warning sign for Oceaneering International you'll probably want to know about.

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.