Independence Contract Drilling's (NYSE:ICD) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Independence Contract Drilling (NYSE:ICD) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Independence Contract Drilling:

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

0.053 = US$20m ÷ (US$406m - US$31m) (Based on the trailing twelve months to September 2023).

So, Independence Contract Drilling has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 13%.

Check out our latest analysis for Independence Contract Drilling

In the above chart we have measured Independence Contract Drilling's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Independence Contract Drilling .

What Can We Tell From Independence Contract Drilling's ROCE Trend?

Independence Contract Drilling has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 5.3% on its capital. Not only that, but the company is utilizing 27% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

Our Take On Independence Contract Drilling's ROCE

Long story short, we're delighted to see that Independence Contract Drilling's reinvestment activities have paid off and the company is now profitable. However the stock is down a substantial 97% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

If you'd like to know about the risks facing Independence Contract Drilling, we've discovered 3 warning signs that you should be aware of.

While Independence Contract Drilling 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.