In This Article:
What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Precision Drilling (TSE:PD) 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. The formula for this calculation on Precision Drilling is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.085 = CA$220m ÷ (CA$2.9b - CA$311m) (Based on the trailing twelve months to June 2024).
Thus, Precision Drilling has an ROCE of 8.5%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 16%.
See our latest analysis for Precision Drilling
Above you can see how the current ROCE for Precision Drilling 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 Precision Drilling for free.
So How Is Precision Drilling's ROCE Trending?
Precision Drilling is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 854% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
In Conclusion...
As discussed above, Precision Drilling appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
One more thing: We've identified 5 warning signs with Precision Drilling (at least 2 which can't be ignored) , and understanding them would certainly be useful.