We Like These Underlying Return On Capital Trends At SM Energy (NYSE:SM)

SM Energy Company +0.57% Pre
 SM Energy Company SM 39.08 39.08 +0.57% 0.00% Pre

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. So when we looked at SM Energy (NYSE:SM) and its trend of ROCE, we really liked what we saw.

## 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 SM Energy:

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

0.15 = US\$893m ÷ (US\$6.4b - US\$536m) (Based on the trailing twelve months to March 2024).

So, SM Energy has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 13% it's much better.

Above you can see how the current ROCE for SM Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering SM Energy for free.

## What Can We Tell From SM Energy's ROCE Trend?

SM Energy's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 490% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

## Our Take On SM Energy's ROCE

To sum it up, SM Energy is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 292% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 1 warning sign with SM Energy and understanding this should be part of your investment process.

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