What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Western Energy Services (TSE:WRG) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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 Western Energy Services:

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

0.0031 = CA$1.3m ÷ (CA$433m - CA$27m) (Based on the trailing twelve months to June 2024).

So, Western Energy Services has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 16%.

See our latest analysis for Western Energy Services

Above you can see how the current ROCE for Western Energy Services compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Western Energy Services .

How Are Returns Trending?

Like most people, we're pleased that Western Energy Services is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 0.3% on their capital employed. In regards to capital employed, Western Energy Services is using 32% 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.

The Bottom Line On Western Energy Services' ROCE

In summary, it's great to see that Western Energy Services has been able to turn things around and earn higher returns on lower amounts of capital. However the stock is down a substantial 90% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

One final note, you should learn about the 2 warning signs we've spotted with Western Energy Services (including 1 which doesn't sit too well with us) .

While Western Energy Services may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.