Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Gulf Island Fabrication's (NASDAQ:GIFI) returns on capital, so let's have a look.

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What Is 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. The formula for this calculation on Gulf Island Fabrication is:

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

0.082 = US$9.2m ÷ (US$133m - US$21m) (Based on the trailing twelve months to December 2024).

Therefore, Gulf Island Fabrication has an ROCE of 8.2%. In absolute terms, that's a low return but it's around the Energy Services industry average of 9.9%.

View our latest analysis for Gulf Island Fabrication

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gulf Island Fabrication's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Gulf Island Fabrication.

The Trend Of ROCE

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 8.2% 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 28%. This could potentially mean that the company is selling some of its assets.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 16%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Gulf Island Fabrication has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

In the end, Gulf Island Fabrication has proven it's capital allocation skills are good with those higher returns from less amount of capital. And a remarkable 124% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Gulf Island Fabrication, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Gulf Island Fabrication may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.