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If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Ensign Energy Services (TSE:ESI) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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 Ensign Energy Services:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = CA$83m ÷ (CA$2.9b - CA$490m) (Based on the trailing twelve months to December 2024).
So, Ensign Energy Services has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 14%.
Check out our latest analysis for Ensign Energy Services
In the above chart we have measured Ensign Energy Services' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Ensign Energy Services .
What Does the ROCE Trend For Ensign Energy Services Tell Us?
While the ROCE is still rather low for Ensign Energy Services, we're glad to see it heading in the right direction. The data shows that returns on capital have increased by 217% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Ensign Energy Services appears to been achieving more with less, since the business is using 25% less capital to run its operation. Ensign Energy Services may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
What We Can Learn From Ensign Energy Services' ROCE
In summary, it's great to see that Ensign Energy Services has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has returned a staggering 603% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.