Returns On Capital At Nine Energy Service (NYSE:NINE) Paint A Concerning Picture

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Nine Energy Service (NYSE:NINE), the trends above didn't look too great.

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 10%.

Check out 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're interested, you can view the analysts predictions in our free analyst report for Nine Energy Service .

What Does the ROCE Trend For Nine Energy Service Tell Us?

We aren't too thrilled by the trend because ROCE has declined 33% over the last five years and despite the capital raising conducted before the latest reports, the business has -71% less capital employed.

On a side note, Nine Energy Service's current liabilities have increased over the last five years to 18% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

In Conclusion...

In summary, it's unfortunate that Nine Energy Service is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 63% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Nine Energy Service, we've spotted 6 warning signs, and 1 of them makes us a bit uncomfortable.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.