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How Has Exterran (NYSE:EXTN) Allocated Its Capital?

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Simply Wall St
·3 min read
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If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Exterran (NYSE:EXTN), we've spotted some signs that it could be struggling, so let's investigate.

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. To calculate this metric for Exterran, this is the formula:

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

0.037 = US$38m ÷ (US$1.3b - US$308m) (Based on the trailing twelve months to September 2020).

Thus, Exterran has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 4.8%.

See our latest analysis for Exterran

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In the above chart we have measured Exterran'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 Exterran here for free.

What The Trend Of ROCE Can Tell Us

We are a bit anxious about the trends of ROCE at Exterran. To be more specific, today's ROCE was 5.9% five years ago but has since fallen to 3.7%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 36% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

In Conclusion...

In summary, it's unfortunate that Exterran is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 64% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

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

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 (at) simplywallst.com.