Be Wary Of ProPetro Holding (NYSE:PUMP) And 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at ProPetro Holding (NYSE:PUMP) and its ROCE trend, we weren't exactly thrilled.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on ProPetro Holding is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$203m ÷ (US$1.5b - US$271m) (Based on the trailing twelve months to December 2023).
Therefore, ProPetro Holding has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 13% generated by the Energy Services industry.
See our latest analysis for ProPetro Holding
Above you can see how the current ROCE for ProPetro Holding 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 analyst report for ProPetro Holding .
What The Trend Of ROCE Can Tell Us
In terms of ProPetro Holding's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 32%, but since then they've fallen to 17%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From ProPetro Holding's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for ProPetro Holding. These growth trends haven't led to growth returns though, since the stock has fallen 63% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
On a separate note, we've found 1 warning sign for ProPetro Holding you'll probably want to know about.
While ProPetro Holding 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.
