Gulfport Energy (NYSE:GPOR) Could Be Struggling To Allocate Capital

What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Gulfport Energy (NYSE:GPOR), the trends above didn't look too great.

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What Is 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. The formula for this calculation on Gulfport Energy is:

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

0.054 = US$136m ÷ (US$2.9b - US$346m) (Based on the trailing twelve months to December 2024).

So, Gulfport Energy has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 10%.

Check out our latest analysis for Gulfport Energy

In the above chart we have measured Gulfport Energy's 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 analyst report for Gulfport Energy .

What The Trend Of ROCE Can Tell Us

The trend of returns that Gulfport Energy is generating are raising some concerns. To be more specific, today's ROCE was 9.9% five years ago but has since fallen to 5.4%. In addition to that, Gulfport Energy is now employing 27% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

In Conclusion...

To see Gulfport Energy reducing the capital employed in the business in tandem with diminishing returns, is concerning. Yet despite these concerning fundamentals, the stock has performed strongly with a 88% return over the last three years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing, we've spotted 1 warning sign facing Gulfport Energy that you might find interesting.

While Gulfport Energy 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.

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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.