Source: Gordon Thompson
Understanding Key Financial Metrics: ROIC and WACC
Mammoth Energy Services, Inc. (NASDAQ:TUSK) is a company that provides oilfield services, infrastructure services, and energy logistics. A critical aspect of understanding the financial health and efficiency of any company involves evaluating its Return on Invested Capital (ROIC) and Weighted Average Cost of Capital (WACC). These two metrics offer valuable insights into a company’s capital utilization and its profitability relative to its cost of capital.
ROIC is a profitability ratio that measures the return that an investment generates for those who have provided long-term capital. It is calculated by dividing net income by the total capital invested in the business. A higher ROIC usually indicates better capital utilization and profitability. Conversely, WACC represents a firm’s cost of capital from all sources, including equity and debt. A lower WACC indicates that a company incurs less cost to finance its operations, which could lead to higher net income and returns.
Analyzing Mammoth Energy Services’ Capital Utilization
In the case of Mammoth Energy Services, the company’s ROIC stands at -21.61%, significantly lower than its WACC of 19.41%. This negative ROIC suggests that the company is currently not generating enough returns to cover its cost of capital, indicating inefficiency in capital utilization. The ratio of ROIC to WACC for TUSK is -1.11, which further emphasizes the company’s underperformance and potential financial risk for investors.
Comparing with Industry Peers
When comparing TUSK’s performance with its industry peers, the differences in capital utilization become evident. For instance, KLX Energy Services Holdings, Inc. (KLXE) has a ROIC of -11.77% and a WACC of 10.91%. Though KLXE is also underperforming, its ratio of ROIC to WACC is slightly better than that of TUSK, suggesting less capital inefficiency.
On the other hand, Select Energy Services, Inc. (WTTR) has a positive ROIC of 3.07% and a WACC of 9.05%. With a ROIC to WACC ratio of 0.34, WTTR demonstrates better capital efficiency compared to TUSK, indicating a potentially safer investment.
Highlighting the Best Performer: NCS Multistage Holdings, Inc. (NCSM)
Among all the peers, NCS Multistage Holdings, Inc. (NCSM) shines the brightest with a ROIC of 6.40% and a WACC of 6.65%. With a ROIC to WACC ratio close to 1 (0.96), NCSM nearly covers its cost of capital, marking it as the most efficient in capital utilization among the companies listed. This superior performance suggests NCSM as a potentially more attractive investment option for those seeking better capital efficiency.
Not the Least Efficient: ProPetro Holding Corp. (PUMP)
On the flip side, ProPetro Holding Corp. (PUMP) has a ROIC of -16.02% and a WACC of 7.79%, resulting in a ROIC to WACC ratio of -2.05. This ratio is worse than TUSK’s, showing that while TUSK is underperforming, it is not the least efficient among its peers. However, investors might still prefer companies like NCSM, which demonstrate a positive ROIC to WACC ratio, indicating more effective capital utilization.
Conclusion
In conclusion, while Mammoth Energy Services shows poor capital utilization, it is not the least efficient among its peers. However, with the energy sector’s competitive nature, investors might want to consider companies with higher capital efficiency such as NCS Multistage Holdings. As always, these metrics should be used in conjunction with other financial indicators to make a fully informed investment decision.