Returns On Capital Are A Standout For Drilling Tools International (NASDAQ:DTI)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at Drilling Tools International's (NASDAQ:DTI) look very promising so lets take a look.

What Is 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 Drilling Tools International:

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

0.27 = US$29m ÷ (US$131m - US$24m) (Based on the trailing twelve months to September 2023).

Thus, Drilling Tools International 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 12%.

View our latest analysis for Drilling Tools International

Historical performance is a great place to start when researching a stock so above you can see the gauge for Drilling Tools International's ROCE against it's prior returns. If you'd like to look at how Drilling Tools International has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The fact that Drilling Tools International is now generating some pre-tax profits from its prior investments is very encouraging. About two years ago the company was generating losses but things have turned around because it's now earning 27% on its capital. And unsurprisingly, like most companies trying to break into the black, Drilling Tools International is utilizing 240% more capital than it was two years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 18%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On Drilling Tools International's ROCE

Long story short, we're delighted to see that Drilling Tools International's reinvestment activities have paid off and the company is now profitable. Although the company may be facing some issues elsewhere since the stock has plunged 74% in the last year. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

Drilling Tools International does have some risks, we noticed 3 warning signs (and 1 which shouldn't be ignored) we think you should 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.