Returns On Capital Are A Standout For Calfrac Well Services (TSE:CFW)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Calfrac Well Services (TSE:CFW) looks great, so lets see what the trend can tell us.

Understanding 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. Analysts use this formula to calculate it for Calfrac Well Services:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.22 = CA$209m ÷ (CA$1.2b - CA$224m) (Based on the trailing twelve months to September 2023).

Therefore, Calfrac Well Services has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.

See our latest analysis for Calfrac Well Services

In the above chart we have measured Calfrac Well Services' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Calfrac Well Services here for free.

How Are Returns Trending?

Calfrac Well Services has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 205%. The company is now earning CA$0.2 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 39% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

In Conclusion...

In summary, it's great to see that Calfrac Well Services has been able to turn things around and earn higher returns on lower amounts of capital. However the stock is down a substantial 98% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

If you want to know some of the risks facing Calfrac Well Services we've found 4 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.