Oil States International (NYSE:OIS) Shareholders Will Want The ROCE Trajectory To Continue
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Oil States International's (NYSE:OIS) returns on capital, so let's have a look.
Understanding 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. The formula for this calculation on Oil States International is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0088 = US$7.7m ÷ (US$1.1b - US$169m) (Based on the trailing twelve months to March 2023).
So, Oil States International has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 9.8%.
View our latest analysis for Oil States International
Above you can see how the current ROCE for Oil States International 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 report for Oil States International.
How Are Returns Trending?
Like most people, we're pleased that Oil States International is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 0.9% which is no doubt a relief for some early shareholders. 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 54%. This could potentially mean that the company is selling some of its assets.
What We Can Learn From Oil States International's ROCE
In the end, Oil States International has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has dived 82% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.
Like most companies, Oil States International does come with some risks, and we've found 2 warning signs that you should be aware of.
While Oil States International isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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