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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. So when we looked at Oil States International (NYSE:OIS) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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 Oil States International, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.016 = US$14m ÷ (US$1.0b - US$144m) (Based on the trailing twelve months to June 2024).
Therefore, Oil States International has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 11%.
View our latest analysis for Oil States International
Above you can see how the current ROCE for Oil States International compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Oil States International .
How Are Returns Trending?
It's great to see that Oil States International has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 53% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.
In Conclusion...
In the end, Oil States International has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 70% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.
While Oil States International looks impressive, no company is worth an infinite price. The intrinsic value infographic for OIS helps visualize whether it is currently trading for a fair price.