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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at STEP Energy Services (TSE:STEP) and its trend of ROCE, we really liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for STEP Energy Services, this is the formula:

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

0.18 = CA$95m ÷ (CA$674m - CA$139m) (Based on the trailing twelve months to June 2024).

Thus, STEP Energy Services has an ROCE of 18%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Energy Services industry average of 16%.

Check out our latest analysis for STEP Energy Services

In the above chart we have measured STEP Energy 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 STEP Energy Services for free.

The Trend Of ROCE

We're delighted to see that STEP Energy Services is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 18% 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 31%. This could potentially mean that the company is selling some of its assets.

The Key Takeaway

In a nutshell, we're pleased to see that STEP Energy Services has been able to generate higher returns from less capital. And a remarkable 175% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

STEP Energy Services does have some risks though, and we've spotted 1 warning sign for STEP Energy Services that you might be interested in.

While STEP Energy 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.