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Identifying a company with strong growth potential requires an examination of key financial metrics. A significant indicator is the Return On Capital Employed (ROCE), which assesses how effectively a company generates pre-tax income from the capital invested in its operations.
For Source Energy Services (TSE:SHLE), ROCE provides valuable insights into its financial health. ROCE is calculated using the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
For the trailing twelve months ending June 2024, Source Energy Services reported a ROCE of 18%. This figure is consistent with the average ROCE of 16% within the Energy Services sector.
Interpreting Source Energy Services' ROCE Trend
Historically, Source Energy Services faced challenges with generating profits. However, recent figures indicate a turnaround, with the company now achieving an 18% ROCE. This improvement suggests that the company is utilizing its capital more efficiently than in the past. Over the last five years, the capital employed by Source Energy Services has decreased by 51%, indicating enhanced operational efficiency or potential asset sales.
It's also noteworthy that the recent ROCE improvement is partly attributed to a rise in current liabilities. Currently, suppliers and short-term creditors finance 52% of the company's operations, a notable increase from five years ago. This elevated level of current liabilities may indicate a shift in the company's financing structure.
Conclusion
Source Energy Services' ability to achieve higher returns with reduced capital is a positive sign of improved financial performance. The stock's 52% return to shareholders over the past five years reflects market confidence in the company's prospects. Monitoring these trends will provide further insights into the company's future performance.
