Source Energy Services (TSE:SHLE) Is Looking To Continue Growing Its Returns On Capital
There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Source Energy Services (TSE:SHLE) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Source Energy Services is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = CA$31m ÷ (CA$322m - CA$91m) (Based on the trailing twelve months to September 2023).
Thus, Source Energy Services has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 15% generated by the Energy Services industry.
View our latest analysis for Source Energy Services
Above you can see how the current ROCE for Source Energy Services compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Source Energy Services Tell Us?
We're pretty happy with how the ROCE has been trending at Source Energy Services. The data shows that returns on capital have increased by 105% over the trailing five years. The company is now earning CA$0.1 per dollar of capital employed. In regards to capital employed, Source Energy Services appears to been achieving more with less, since the business is using 51% less capital to run its operation. Source Energy Services may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
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 28% 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.
What We Can Learn From Source Energy Services' ROCE
In the end, Source Energy Services has proven it's capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 45% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.
Source Energy Services does have some risks, we noticed 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
While Source Energy Services 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.
