We Like These Underlying Return On Capital Trends At Western Energy Services (TSE:WRG)
Did you know there are some financial metrics that can provide clues of a potential 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Western Energy Services (TSE:WRG) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Western Energy Services:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.012 = CA$5.4m ÷ (CA$484m - CA$38m) (Based on the trailing twelve months to March 2023).
So, Western Energy Services has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 11%.
See our latest analysis for Western Energy Services
In the above chart we have measured Western Energy Services' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Western Energy Services here for free.
What Does the ROCE Trend For Western Energy Services Tell Us?
Like most people, we're pleased that Western Energy Services is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 1.2% which is no doubt a relief for some early shareholders. In regards to capital employed, Western Energy Services is using 34% 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.
In Conclusion...
In the end, Western Energy Services has proven it's capital allocation skills are good with those higher returns from less amount of capital. However the stock is down a substantial 98% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
One more thing: We've identified 3 warning signs with Western Energy Services (at least 1 which is a bit concerning) , and understanding these would certainly be useful.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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