The Returns On Capital At Core Laboratories (NYSE:CLB) Don't Inspire Confidence

By
Simply Wall St
Published
November 24, 2021
NYSE:CLB
Source: Shutterstock

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount 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 Core Laboratories (NYSE:CLB), so let's see why.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Core Laboratories:

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

0.085 = US$42m ÷ (US$586m - US$93m) (Based on the trailing twelve months to September 2021).

Therefore, Core Laboratories has an ROCE of 8.5%. On its own, that's a low figure but it's around the 7.2% average generated by the Energy Services industry.

See our latest analysis for Core Laboratories

roce
NYSE:CLB Return on Capital Employed November 24th 2021

In the above chart we have measured Core Laboratories' 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 Core Laboratories.

How Are Returns Trending?

There is reason to be cautious about Core Laboratories, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 22% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Core Laboratories becoming one if things continue as they have.

The Bottom Line On Core Laboratories' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. We expect this has contributed to the stock plummeting 73% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Core Laboratories does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

While Core Laboratories may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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