If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Calfrac Well Services (TSE:CFW) so let's look a bit deeper.

What Is 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 Calfrac Well Services:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.11 = CA$121m ÷ (CA$1.3b - CA$243m) (Based on the trailing twelve months to June 2024).

Therefore, Calfrac Well Services has an ROCE of 11%. In isolation, that's a pretty standard return but against the Energy Services industry average of 16%, it's not as good.

See our latest analysis for Calfrac Well Services

Above you can see how the current ROCE for Calfrac Well Services 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 Calfrac Well Services .

How Are Returns Trending?

You'd find it hard not to be impressed with the ROCE trend at Calfrac Well Services. We found that the returns on capital employed over the last five years have risen by 370%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 28% less capital than it was five years ago. Calfrac Well Services may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Key Takeaway

In the end, Calfrac Well Services has proven it's capital allocation skills are good with those higher returns from less amount of capital. Although the company may be facing some issues elsewhere since the stock has plunged 95% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.