U.S. markets open in 2 hours 10 minutes
  • S&P Futures

    4,528.25
    +19.75 (+0.44%)
     
  • Dow Futures

    34,250.00
    +248.00 (+0.73%)
     
  • Nasdaq Futures

    15,876.25
    +6.50 (+0.04%)
     
  • Russell 2000 Futures

    2,164.90
    +18.60 (+0.87%)
     
  • Crude Oil

    65.72
    +0.15 (+0.23%)
     
  • Gold

    1,779.30
    -5.00 (-0.28%)
     
  • Silver

    22.40
    +0.06 (+0.25%)
     
  • EUR/USD

    1.1342
    +0.0019 (+0.17%)
     
  • 10-Yr Bond

    1.4340
    0.0000 (0.00%)
     
  • Vix

    28.49
    +1.30 (+4.78%)
     
  • GBP/USD

    1.3321
    +0.0043 (+0.33%)
     
  • USD/JPY

    112.8460
    +0.0660 (+0.06%)
     
  • BTC-USD

    56,197.01
    -1,088.16 (-1.90%)
     
  • CMC Crypto 200

    1,433.40
    -35.68 (-2.43%)
     
  • FTSE 100

    7,109.20
    -59.48 (-0.83%)
     
  • Nikkei 225

    27,753.37
    -182.25 (-0.65%)
     

How Has Core Laboratories (NYSE:CLB) Allocated Its Capital?

  • Oops!
    Something went wrong.
    Please try again later.
·3 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Core Laboratories (NYSE:CLB) we aren't filled with optimism, but let's investigate further.

What is Return On Capital Employed (ROCE)?

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 Core Laboratories:

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

0.15 = US$61m ÷ (US$591m - US$172m) (Based on the trailing twelve months to September 2020).

Thus, Core Laboratories has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 2.9% generated by the Energy Services industry.

View our latest analysis for Core Laboratories

roce
roce

Above you can see how the current ROCE for Core Laboratories compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Core Laboratories here for free.

What Can We Tell From Core Laboratories' ROCE Trend?

We are a bit worried about the trend of returns on capital at Core Laboratories. About five years ago, returns on capital were 47%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Core Laboratories becoming one if things continue as they have.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Unsurprisingly then, the stock has dived 77% over the last five years, so investors are recognizing these changes and don't like the company's prospects. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 2 warning signs with Core Laboratories (at least 1 which is significant) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

This article by Simply Wall St is general in nature. 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.

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