Nine Energy Service (NYSE:NINE) Will Be Hoping To Turn Its Returns On Capital Around

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Nine Energy Service (NYSE:NINE), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Nine Energy Service, this is the formula:

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

0.029 = US$8.3m ÷ (US$353m - US$64m) (Based on the trailing twelve months to September 2024).

Thus, Nine Energy Service has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 11%.

See our latest analysis for Nine Energy Service

Above you can see how the current ROCE for Nine Energy Service compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Nine Energy Service for free.

So How Is Nine Energy Service's ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 4.3% five years ago and the business is utilizing 71% less capital, even after their capital raise (conducted prior to the latest reporting period).

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 18%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 2.9%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line On Nine Energy Service's ROCE

In summary, it's unfortunate that Nine Energy Service is shrinking its capital base and also generating lower returns. Unsurprisingly then, the stock has dived 77% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Nine Energy Service does come with some risks though, we found 6 warning signs in our investment analysis, and 1 of those is potentially serious...

While Nine Energy Service 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.