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

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in Helmerich & Payne's (NYSE:HP) returns on capital, so let's have a look.

Understanding 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. 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$419m ÷ (US$4.5b - US$457m) (Based on the trailing twelve months to June 2024).

Thus, Helmerich & Payne has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Energy Services industry average of 11%.

See our latest analysis for Helmerich & Payne

Above you can see how the current ROCE for Helmerich & Payne 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 analyst report for Helmerich & Payne .

So How Is Helmerich & Payne's ROCE Trending?

We're pretty happy with how the ROCE has been trending at Helmerich & Payne. The data shows that returns on capital have increased by 145% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 27% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

The Key Takeaway

In a nutshell, we're pleased to see that Helmerich & Payne has been able to generate higher returns from less capital. Considering the stock has delivered 1.5% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Helmerich & Payne (of which 1 is potentially serious!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.