When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we’ll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn’t compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Select Water Solutions (NYSE:WTTR), we weren’t too upbeat about how things were going.
What Is 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 Select Water Solutions is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.059 = US$64m ÷ (US$1.3b – US$212m) (Based on the…
