The Trends At Cactus (NYSE:WHD) That You Should Know About
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Cactus' (NYSE:WHD) trend of ROCE, we liked what we saw.
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 Cactus is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$134m ÷ (US$822m - US$59m) (Based on the trailing twelve months to June 2020).
Thus, Cactus has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Energy Services industry average of 5.7% it's much better.
View our latest analysis for Cactus
Above you can see how the current ROCE for Cactus compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Cactus here for free.
What Does the ROCE Trend For Cactus Tell Us?
While the returns on capital are good, they haven't moved much. The company has consistently earned 18% for the last four years, and the capital employed within the business has risen 410% in that time. 18% is a pretty standard return, and it provides some comfort knowing that Cactus has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line
The main thing to remember is that Cactus has proven its ability to continually reinvest at respectable rates of return. Despite the good fundamentals, total returns from the stock have been virtually flat over the last year. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
Like most companies, Cactus does come with some risks, and we've found 1 warning sign that you should be aware of.
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.
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