Returns on Capital Paint A Bright Future For Trican Well Service (TSE:TCW)
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Speaking of which, we noticed some great changes in Trican Well Service's (TSE:TCW) returns on capital, so let's have a look.
Understanding 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 Trican Well Service, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.28 = CA$161m ÷ (CA$710m - CA$144m) (Based on the trailing twelve months to December 2023).
Thus, Trican Well Service has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Energy Services industry average of 14%.
Check out our latest analysis for Trican Well Service
In the above chart we have measured Trican Well Service'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 analyst report for Trican Well Service .
What The Trend Of ROCE Can Tell Us
We're delighted to see that Trican Well Service is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 28% which is no doubt a relief for some early shareholders. In regards to capital employed, Trican Well Service is using 41% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 20% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
The Key Takeaway
In a nutshell, we're pleased to see that Trican Well Service has been able to generate higher returns from less capital. Since the stock has returned a staggering 235% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Trican Well Service can keep these trends up, it could have a bright future ahead.
On a final note, we found 2 warning signs for Trican Well Service (1 is significant) you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.
