When we research a business, sometimes it is difficult to find the warning signs, but there are financial metrics that can help spot problems early. Declining businesses often have two underlying trends, on the one hand, a decline return on capital employed (ROCE) and a decrease based capital employed. Basically, the company earns less on its investments and it also reduces its total assets. And from the first reading, things don’t look very good Halliburton (NYSE: HAL), so let’s see why.
Return on capital employed (ROCE): what is it?
If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. The formula for this calculation on Halliburton is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.027 = $ 445 million ÷ ($ 21 billion – $ 4.2 billion) (Based on the last twelve months up to March 2021).
Therefore, Halliburton has a ROCE of 2.7%. In absolute terms, this is a low return and it is also below the energy services industry average of 5.1%.
See our latest analysis for Halliburton
In the graph above, we measured Halliburton’s past ROCE against its past performance, but the future is arguably more important. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
What can we say about Halliburton’s ROCE trend?
In terms of Halliburton’s historic ROCE trend, that’s not fantastic. Unfortunately, yields have declined significantly over the past five years to reach 2.7% today. Equally concerning is that the amount of capital deployed in the business has decreased by 38% over the same period. The combination of lower ROCE and less capital employed can indicate that a business is likely to face competitive headwinds or to see its moat eroded. If these underlying trends continue, we wouldn’t be too optimistic about the future.
The key to take away
In summary, it is unfortunate that Halliburton is reducing its capital base and also generating lower returns. So it’s no surprise that the stock has fallen 42% in the past five years, so it looks like investors are recognizing these changes. Unless there is a change to a more positive trajectory in these metrics, we would look elsewhere.
If you are still interested in Halliburton, it is worth checking out our FREE approximation of intrinsic value to see if it trades attractively in other respects.
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