ProPetro Holding (NYSE:PUMP) Is Finding It Tricky To Allocate Its Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into ProPetro Holding (NYSE:PUMP), the trends above didn't look too great.

Understanding 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 ProPetro Holding:

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

0.085 = US$104m ÷ (US$1.5b - US$296m) (Based on the trailing twelve months to June 2024).

Thus, ProPetro Holding has an ROCE of 8.5%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 11%.

See our latest analysis for ProPetro Holding

In the above chart we have measured ProPetro Holding'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 ProPetro Holding .

What Can We Tell From ProPetro Holding's ROCE Trend?

There is reason to be cautious about ProPetro Holding, given the returns are trending downwards. About five years ago, returns on capital were 32%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on ProPetro Holding becoming one if things continue as they have.

What We Can Learn From ProPetro Holding's ROCE

In summary, it's unfortunate that ProPetro Holding is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 26% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know about the risks facing ProPetro Holding, we've discovered 2 warning signs that you should be aware of.

While ProPetro Holding 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.