There's Been No Shortage Of Growth Recently For Geospace Technologies' (NASDAQ:GEOS) Returns On Capital
Did you know there are some financial metrics that can provide clues of a potential 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. 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 when we looked at Geospace Technologies (NASDAQ:GEOS) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Geospace Technologies is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.075 = US$10m ÷ (US$153m - US$20m) (Based on the trailing twelve months to September 2023).
Thus, Geospace Technologies has an ROCE of 7.5%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 12%.
See our latest analysis for Geospace Technologies
Historical performance is a great place to start when researching a stock so above you can see the gauge for Geospace Technologies' ROCE against it's prior returns. If you'd like to look at how Geospace Technologies has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Geospace Technologies' ROCE Trending?
Like most people, we're pleased that Geospace Technologies is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Geospace Technologies is using 28% 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. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
The Key Takeaway
From what we've seen above, Geospace Technologies has managed to increase it's returns on capital all the while reducing it's capital base. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
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.
