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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Trican Well Service's (TSE:TCW) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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 Trican Well Service:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = CA$146m ÷ (CA$633m - CA$84m) (Based on the trailing twelve months to September 2024).
So, Trican Well Service has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.
View our latest analysis for Trican Well Service
Above you can see how the current ROCE for Trican Well Service 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 Trican Well Service for free.
So How Is Trican Well Service's ROCE Trending?
We're delighted to see that Trican Well Service is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 27% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 36% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
The Bottom Line
In summary, it's great to see that Trican Well Service has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has returned a staggering 397% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.