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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Speaking of which, we noticed some great changes in Orbit Garant Drilling's (TSE:OGD) 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. Analysts use this formula to calculate it for Orbit Garant Drilling:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = CA$8.8m ÷ (CA$129m - CA$32m) (Based on the trailing twelve months to September 2024).
So, Orbit Garant Drilling has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 1.1% generated by the Metals and Mining industry, it's much better.
See our latest analysis for Orbit Garant Drilling
In the above chart we have measured Orbit Garant Drilling's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Orbit Garant Drilling for free.
What The Trend Of ROCE Can Tell Us
Orbit Garant Drilling's ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 946% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
In Conclusion...
As discussed above, Orbit Garant Drilling appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And since the stock has fallen 13% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
One more thing: We've identified 3 warning signs with Orbit Garant Drilling (at least 1 which is a bit concerning) , and understanding them would certainly be useful.