AKITA Drilling (TSE:AKT.A) Is Experiencing Growth In Returns On Capital
What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, AKITA Drilling (TSE:AKT.A) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for AKITA Drilling:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.096 = CA$23m ÷ (CA$266m - CA$28m) (Based on the trailing twelve months to June 2023).
Thus, AKITA Drilling has an ROCE of 9.6%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 13%.
See our latest analysis for AKITA Drilling
Above you can see how the current ROCE for AKITA Drilling 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 report on analyst forecasts for the company.
How Are Returns Trending?
AKITA Drilling has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 9.6% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, AKITA Drilling is utilizing 30% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
The Bottom Line On AKITA Drilling's ROCE
In summary, it's great to see that AKITA Drilling has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 64% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.
If you'd like to know more about AKITA Drilling, we've spotted 3 warning signs, and 1 of them shouldn't be ignored.
While AKITA Drilling isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
