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There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in CH Offshore's (SGX:C13) returns on capital, so let's have a look.
What Is 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. To calculate this metric for CH Offshore, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0069 = US$288k ÷ (US$58m - US$16m) (Based on the trailing twelve months to June 2024).
Thus, CH Offshore has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 11%.
See our latest analysis for CH Offshore
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of CH Offshore.
What Can We Tell From CH Offshore's ROCE Trend?
Like most people, we're pleased that CH Offshore is now generating some pretax earnings. 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. CH Offshore could be selling under-performing assets since the ROCE is improving.
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. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
In Conclusion...
From what we've seen above, CH Offshore 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.