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What These Trends Mean At Helmerich & Payne (NYSE:HP)

Simply Wall St
·3 min read

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Helmerich & Payne (NYSE:HP), we weren't too upbeat about how things were going.

What is 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. Analysts use this formula to calculate it for Helmerich & Payne:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.03 = US$144m ÷ (US$5.2b - US$377m) (Based on the trailing twelve months to March 2020).

Therefore, Helmerich & Payne has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 6.3%.

See our latest analysis for Helmerich & Payne

roce
roce

In the above chart we have a measured Helmerich & Payne'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 Can We Tell From Helmerich & Payne's ROCE Trend?

We are a bit anxious about the trends of ROCE at Helmerich & Payne. The company used to generate 16% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 31% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. 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.

The Bottom Line

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Investors haven't taken kindly to these developments, since the stock has declined 57% from where it was five years ago. Unless these trends revert to a more positive trajectory, we would look elsewhere.

If you'd like to know more about Helmerich & Payne, we've spotted 2 warning signs, and 1 of them is potentially serious.

While Helmerich & Payne may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.