Is Drilling Company of 1972 (CPH:DRLCO) Headed For Trouble?

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Drilling Company of 1972 (CPH:DRLCO), so let's see why.

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. The formula for this calculation on Drilling Company of 1972 is:

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

0.00093 = US$3.0m ÷ (US$3.7b - US$503m) (Based on the trailing twelve months to December 2020).

Thus, Drilling Company of 1972 has an ROCE of 0.09%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 5.8%.

Check out our latest analysis for Drilling Company of 1972

Above you can see how the current ROCE for Drilling Company of 1972 compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Drilling Company of 1972.

The Trend Of ROCE

The trend of ROCE at Drilling Company of 1972 is showing some signs of weakness. Unfortunately, returns have declined substantially over the last four years to the 0.09% we see today. On top of that, the business is utilizing 70% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line

To see Drilling Company of 1972 reducing the capital employed in the business in tandem with diminishing returns, is concerning. Long term shareholders who've owned the stock over the last year have experienced a 44% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing to note, we've identified 2 warning signs with Drilling Company of 1972 and understanding these should be part of your investment process.

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This article by Simply Wall St is general in nature. 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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