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Today we'll look at Solaris Oilfield Infrastructure, Inc. (NYSE:SOI) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Solaris Oilfield Infrastructure:
0.28 = US$112m ÷ (US$432m - US$26m) (Based on the trailing twelve months to March 2019.)
So, Solaris Oilfield Infrastructure has an ROCE of 28%.
Does Solaris Oilfield Infrastructure Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Solaris Oilfield Infrastructure's ROCE is meaningfully higher than the 8.9% average in the Energy Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Solaris Oilfield Infrastructure's ROCE currently appears to be excellent.
Solaris Oilfield Infrastructure has an ROCE of 28%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That suggests the business has returned to profitability.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Given the industry it operates in, Solaris Oilfield Infrastructure could be considered cyclical. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Solaris Oilfield Infrastructure's Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Solaris Oilfield Infrastructure has total liabilities of US$26m and total assets of US$432m. As a result, its current liabilities are equal to approximately 6.0% of its total assets. Modest current liabilities are not boosting Solaris Oilfield Infrastructure's very nice ROCE.
The Bottom Line On Solaris Oilfield Infrastructure's ROCE
This is an attractive combination and suggests the company could have potential. There might be better investments than Solaris Oilfield Infrastructure out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
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We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.