Should You Be Worried About Halliburton's (NYSE:HAL) Returns On Capital?
NYSE:HAL), the trends above didn’t look too great.” data-reactid=”28″>Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that’s often how a mature business shows signs of aging. This reveals that the company isn’t compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Halliburton (NYSE:HAL), the trends above didn’t look too great.
Return On Capital Employed (ROCE): What is it?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Halliburton:
Check out our latest analysis for Halliburton ” data-reactid=”38″> Check out our latest analysis for Halliburton
report on analyst forecasts for the company.” data-reactid=”51″>In the above chart we have measured Halliburton’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
The trend of returns that Halliburton is generating are raising some concerns. The company used to generate 16% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 33% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn’t be too optimistic going forward.
The Bottom Line On Halliburton’s ROCE
To see Halliburton reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors haven’t taken kindly to these developments, since the stock has declined 47% from where it was five years ago. Unless these trends revert to a more positive trajectory, we would look elsewhere.
1 warning sign facing Halliburton that you might find interesting.” data-reactid=”56″>One more thing, we’ve spotted 1 warning sign facing Halliburton that you might find interesting.
list of companies with solid balance sheets and high returns on equity.” data-reactid=”57″>For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
Get in touch with us directly. Alternatively, email [email protected].” data-reactid=”58″>This article by Simply Wall St is general in nature. 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.
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