Stock Analysis

Returns on Capital Paint A Bright Future For NexTier Oilfield Solutions (NYSE:NEX)

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NYSE:NEX
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at NexTier Oilfield Solutions' (NYSE:NEX) look very promising so lets take a look.

Return On Capital Employed (ROCE): What Is It?

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 NexTier Oilfield Solutions is:

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

0.21 = US$243m ÷ (US$1.8b - US$649m) (Based on the trailing twelve months to September 2022).

Therefore, NexTier Oilfield Solutions has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Energy Services industry average of 7.0%.

Check out the opportunities and risks within the US Energy Services industry.

roce
NYSE:NEX Return on Capital Employed December 8th 2022

In the above chart we have measured NexTier Oilfield Solutions' 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 report on analyst forecasts for the company.

How Are Returns Trending?

We're delighted to see that NexTier Oilfield Solutions is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 21% on its capital. Not only that, but the company is utilizing 53% 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.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 36% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

To the delight of most shareholders, NexTier Oilfield Solutions has now broken into profitability. And since the stock has fallen 40% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to continue researching NexTier Oilfield Solutions, you might be interested to know about the 1 warning sign that our analysis has discovered.

NexTier Oilfield Solutions is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

What are the risks and opportunities for NexTier Oilfield Solutions?

NexTier Oilfield Solutions Inc., through its subsidiaries, provides well completion and production services in various active and demanding basins.

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Rewards

  • Trading at 74.7% below our estimate of its fair value

  • Earnings are forecast to grow 46.94% per year

  • Became profitable this year

Risks

  • Significant insider selling over the past 3 months

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