Calfrac Well Services (TSE:CFW) Knows How To Allocate Capital Effectively
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, the ROCE of Calfrac Well Services (TSE:CFW) looks great, so lets see what the trend can tell us.
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. The formula for this calculation on Calfrac Well Services is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = CA$209m ÷ (CA$1.2b - CA$224m) (Based on the trailing twelve months to September 2023).
Thus, Calfrac Well Services has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Energy Services industry average of 15%.
View our latest analysis for Calfrac Well Services
Above you can see how the current ROCE for Calfrac Well Services compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Calfrac Well Services .
So How Is Calfrac Well Services' ROCE Trending?
We're pretty happy with how the ROCE has been trending at Calfrac Well Services. We found that the returns on capital employed over the last five years have risen by 205%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Calfrac Well Services appears to been achieving more with less, since the business is using 39% less capital to run its operation. Calfrac Well Services may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Bottom Line On Calfrac Well Services' ROCE
From what we've seen above, Calfrac Well Services has managed to increase it's returns on capital all the while reducing it's capital base. Although the company may be facing some issues elsewhere since the stock has plunged 97% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
Calfrac Well Services does have some risks, we noticed 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.
Calfrac Well Services is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
