What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in ProFrac Holding's (NASDAQ:ACDC) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for ProFrac Holding:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = US$105m ÷ (US$3.2b - US$700m) (Based on the trailing twelve months to June 2024).
Thus, ProFrac Holding has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 10%.
Above you can see how the current ROCE for ProFrac Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for ProFrac Holding .
What Does the ROCE Trend For ProFrac Holding Tell Us?
We're delighted to see that ProFrac Holding is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses four years ago, but now it's earning 4.3% which is a sight for sore eyes. In addition to that, ProFrac Holding is employing 392% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Bottom Line On ProFrac Holding's ROCE
In summary, it's great to see that ProFrac Holding has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 33% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
Like most companies, ProFrac Holding does come with some risks, and we've found 2 warning signs that you should be aware of.
While ProFrac 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.
