Returns Are Gaining Momentum At Transocean (NYSE:RIG)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Transocean (NYSE:RIG) so let's look a bit deeper.

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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. The formula for this calculation on Transocean is:

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

0.022 = US$395m ÷ (US$19b - US$1.7b) (Based on the trailing twelve months to December 2024).

So, Transocean has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 9.8%.

Check out our latest analysis for Transocean

Above you can see how the current ROCE for Transocean 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 Transocean for free.

What The Trend Of ROCE Can Tell Us

Like most people, we're pleased that Transocean is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. 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 21%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

The Key Takeaway

In a nutshell, we're pleased to see that Transocean has been able to generate higher returns from less capital. And with a respectable 42% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

While Transocean looks impressive, no company is worth an infinite price. The intrinsic value infographic for RIG helps visualize whether it is currently trading for a fair price.

While Transocean 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.