There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at Gulf Island Fabrication (NASDAQ:GIFI) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Gulf Island Fabrication:

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

0.13 = US$14m ÷ (US$131m - US$22m) (Based on the trailing twelve months to September 2024).

Thus, Gulf Island Fabrication has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 11% generated by the Energy Services industry.

Check out our latest analysis for Gulf Island Fabrication

In the above chart we have measured Gulf Island Fabrication's 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 Island Fabrication for free.

How Are Returns Trending?

Like most people, we're pleased that Gulf Island Fabrication 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 13% 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 44%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

One more thing to note, Gulf Island Fabrication has decreased current liabilities to 17% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From Gulf Island Fabrication's ROCE

In a nutshell, we're pleased to see that Gulf Island Fabrication has been able to generate higher returns from less capital. And with a respectable 55% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Gulf Island Fabrication can keep these trends up, it could have a bright future ahead.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for GIFI on our platform that is definitely worth checking out.

While Gulf Island Fabrication isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.