Yahoo Finance Returns Are Gaining Momentum At Precision Drilling (TSE:PD)
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Precision Drilling (TSE:PD) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Precision Drilling, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = CA$314m ÷ (CA$3.0b - CA$366m) (Based on the trailing twelve months to December 2023).
Thus, Precision Drilling has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Energy Services industry average of 14%.
Check out our latest analysis for Precision Drilling
Above you can see how the current ROCE for Precision Drilling 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 Precision Drilling .
How Are Returns Trending?
It's great to see that Precision Drilling has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 12% which is no doubt a relief for some early shareholders. In regards to capital employed, Precision Drilling is using 21% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
In Conclusion...
From what we've seen above, Precision Drilling has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has only returned 33% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
If you'd like to know more about Precision Drilling, we've spotted 4 warning signs, and 1 of them makes us a bit uncomfortable.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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.
