Investors Should Be Encouraged By Trican Well Service's (TSE:TCW) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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$145m ÷ (CA$683m - CA$135m) (Based on the trailing twelve months to December 2024).

Thus, Trican Well Service has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Energy Services industry average of 14%.

View our latest analysis for Trican Well Service

In the above chart we have measured Trican Well Service's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Trican Well Service .

What Does the ROCE Trend For Trican Well Service Tell Us?

Like most people, we're pleased that Trican Well Service is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 27% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 34%. Trican Well Service could be selling under-performing assets since the ROCE is improving.

What We Can Learn From Trican Well Service's ROCE

From what we've seen above, Trican Well Service has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a staggering 568% 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.

On a separate note, we've found 1 warning sign for Trican Well Service you'll probably want to know about.

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.