Capital Allocation Trends At Solaris Oilfield Infrastructure (NYSE:SOI) Aren't Ideal

What underlying fundamental trends can indicate that a company might be in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Solaris Oilfield Infrastructure (NYSE:SOI), the trends above didn't look too great.

Understanding 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 Solaris Oilfield Infrastructure:

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

0.11 = US$47m ÷ (US$457m - US$35m) (Based on the trailing twelve months to March 2024).

Thus, Solaris Oilfield Infrastructure has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Energy Services industry average of 12%.

See our latest analysis for Solaris Oilfield Infrastructure

roce

In the above chart we have measured Solaris Oilfield Infrastructure's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Solaris Oilfield Infrastructure for free.

What Does the ROCE Trend For Solaris Oilfield Infrastructure Tell Us?

We are a bit worried about the trend of returns on capital at Solaris Oilfield Infrastructure. Unfortunately the returns on capital have diminished from the 25% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Solaris Oilfield Infrastructure becoming one if things continue as they have.

What We Can Learn From Solaris Oilfield Infrastructure's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 30% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a separate note, we've found 1 warning sign for Solaris Oilfield Infrastructure you'll probably want to know about.

While Solaris Oilfield Infrastructure 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.

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