What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Solaris Oilfield Infrastructure (NYSE:SOI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. To calculate this metric for Solaris Oilfield Infrastructure, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = US$38m ÷ (US$460m - US$61m) (Based on the trailing twelve months to September 2022).
Thus, Solaris Oilfield Infrastructure has an ROCE of 9.5%. In absolute terms, that's a low return, but it's much better than the Energy Services industry average of 5.8%.
In the above chart we have measured Solaris Oilfield Infrastructure's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Solaris Oilfield Infrastructure.
So How Is Solaris Oilfield Infrastructure's ROCE Trending?
The returns on capital haven't changed much for Solaris Oilfield Infrastructure in recent years. The company has employed 92% more capital in the last five years, and the returns on that capital have remained stable at 9.5%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
Our Take On Solaris Oilfield Infrastructure's ROCE
As we've seen above, Solaris Oilfield Infrastructure's returns on capital haven't increased but it is reinvesting in the business. And in the last five years, the stock has given away 14% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
One more thing, we've spotted 2 warning signs facing Solaris Oilfield Infrastructure that you might find interesting.
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.
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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.
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