Returns On Capital Are Showing Encouraging Signs At Helmerich & Payne (NYSE:HP)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Helmerich & Payne (NYSE:HP) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Helmerich & Payne, this is the formula:

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

0.10 = US$395m ÷ (US$4.4b - US$414m) (Based on the trailing twelve months to March 2023).

Thus, Helmerich & Payne has an ROCE of 10.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.9%.

See our latest analysis for Helmerich & Payne

In the above chart we have measured Helmerich & Payne's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Helmerich & Payne here for free.

What Can We Tell From Helmerich & Payne's ROCE Trend?

Like most people, we're pleased that Helmerich & Payne 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 10.0% 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 33%. Helmerich & Payne could be selling under-performing assets since the ROCE is improving.

The Bottom Line

In summary, it's great to see that Helmerich & Payne has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 38% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

While Helmerich & Payne isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.