Are Solaris Oilfield Infrastructure, Inc.’s (NYSE:SOI) High Returns Really That Great?

Today we’ll evaluate Solaris Oilfield Infrastructure, Inc. (NYSE:SOI) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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

Or for Solaris Oilfield Infrastructure:

0.23 = US$106m ÷ (US$506m – US$35m) (Based on the trailing twelve months to September 2019.)

Therefore, Solaris Oilfield Infrastructure has an ROCE of 23%.

View our latest analysis for Solaris Oilfield Infrastructure

Does Solaris Oilfield Infrastructure Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Solaris Oilfield Infrastructure’s ROCE appears to be substantially greater than the 9.7% average in the Energy Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Solaris Oilfield Infrastructure’s ROCE is currently very good.

Solaris Oilfield Infrastructure has an ROCE of 23%, but it didn’t have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving. The image below shows how Solaris Oilfield Infrastructure’s ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:SOI Past Revenue and Net Income, January 22nd 2020
NYSE:SOI Past Revenue and Net Income, January 22nd 2020

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Remember that most companies like Solaris Oilfield Infrastructure are cyclical businesses. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do Solaris Oilfield Infrastructure’s Current Liabilities Skew Its ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.

Solaris Oilfield Infrastructure has total assets of US$506m and current liabilities of US$35m. Therefore its current liabilities are equivalent to approximately 6.9% of its total assets. Solaris Oilfield Infrastructure has low current liabilities, which have a negligible impact on its relatively good ROCE.

Our Take On Solaris Oilfield Infrastructure’s ROCE

This suggests the company would be worth researching in more depth. Solaris Oilfield Infrastructure looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.