Some Investors May Be Worried About Cactus' (NYSE:WHD) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Cactus (NYSE:WHD) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Cactus is:

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

0.17 = US$175m ÷ (US$1.1b - US$117m) (Based on the trailing twelve months to December 2022).

Thus, Cactus has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Energy Services industry average of 9.0% it's much better.

View our latest analysis for Cactus

Above you can see how the current ROCE for Cactus 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 report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

In terms of Cactus' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 42% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Cactus' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Cactus is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 56% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Cactus does have some risks though, and we've spotted 2 warning signs for Cactus that you might be interested in.

While Cactus 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.