Here's What's Concerning About Dril-Quip's (NYSE:DRQ) Returns On Capital
Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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 the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Dril-Quip (NYSE:DRQ), the trends above didn't look too great.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Dril-Quip:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.00023 = US$210k ÷ (US$1.0b - US$107m) (Based on the trailing twelve months to September 2023).
So, Dril-Quip has an ROCE of 0.02%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 13%.
Check out our latest analysis for Dril-Quip
In the above chart we have measured Dril-Quip's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
We are a bit anxious about the trends of ROCE at Dril-Quip. The company used to generate 0.5% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 26% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
What We Can Learn From Dril-Quip's ROCE
In summary, it's unfortunate that Dril-Quip is shrinking its capital base and also generating lower returns. It should come as no surprise then that the stock has fallen 43% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you're still interested in Dril-Quip it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
While Dril-Quip 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.
