Returns Are Gaining Momentum At AKITA Drilling (TSE:AKT.A)
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at AKITA Drilling (TSE:AKT.A) so let's look a bit deeper.
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 AKITA Drilling:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.098 = CA$23m ÷ (CA$267m - CA$29m) (Based on the trailing twelve months to September 2023).
Therefore, AKITA Drilling has an ROCE of 9.8%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 15%.
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 analyst report for AKITA Drilling .
What Does the ROCE Trend For AKITA Drilling Tell Us?
Like most people, we're pleased that AKITA Drilling is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 9.8% on their capital employed. In regards to capital employed, AKITA Drilling is using 35% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.
The Bottom Line On AKITA Drilling's ROCE
From what we've seen above, AKITA Drilling has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 62% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
Like most companies, AKITA Drilling does come with some risks, and we've found 2 warning signs that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
