Slowing Rates Of Return At Gulf Marine Services (LON:GMS) Leave Little Room For Excitement

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Gulf Marine Services (LON:GMS), it didn't seem to tick all of these boxes.

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. To calculate this metric for Gulf Marine Services, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.072 = US$43m ÷ (US$661m - US$59m) (Based on the trailing twelve months to June 2022).

Thus, Gulf Marine Services has an ROCE of 7.2%. Even though it's in line with the industry average of 7.2%, it's still a low return by itself.

View our latest analysis for Gulf Marine Services

roce

In the above chart we have measured Gulf Marine Services' 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 Gulf Marine Services here for free.

The Trend Of ROCE

In terms of Gulf Marine Services' historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 7.2% and the business has deployed 35% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Gulf Marine Services has done well to reduce current liabilities to 9.0% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Gulf Marine Services' ROCE

In conclusion, Gulf Marine Services has been investing more capital into the business, but returns on that capital haven't increased. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 88% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we found 4 warning signs for Gulf Marine Services (1 is significant) you should be aware of.

While Gulf Marine Services 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.

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