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There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Ensign Energy Services (TSE:ESI) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Ensign Energy Services is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = CA$128m ÷ (CA$2.9b - CA$372m) (Based on the trailing twelve months to June 2024).
Thus, Ensign Energy Services has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 16%.
Check out our latest analysis for Ensign Energy Services
Above you can see how the current ROCE for Ensign Energy Services 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 Ensign Energy Services for free.
So How Is Ensign Energy Services' ROCE Trending?
We're delighted to see that Ensign Energy Services is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 5.0% on their capital employed. 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 27%. This could potentially mean that the company is selling some of its assets.
The Key Takeaway
From what we've seen above, Ensign Energy Services has managed to increase it's returns on capital all the while reducing it's capital base. Considering the stock has delivered 8.9% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Ensign Energy Services (of which 1 is significant!) that you should know about.