Return on Capital Employed Overview: Southwest Gas Holdings

Pulled from Benzinga Pro data Southwest Gas Holdings SWX posted a 65.83% decrease in earnings from Q1. Sales, however, increased by 57.38% over the previous quarter to $821.42 million. Despite the increase in sales this quarter, the decrease in earnings may suggest Southwest Gas Holdings is not utilizing their capital as effectively as possible. Southwest Gas Holdings reached earnings of $173.45 million and sales of $521.93 million in Q1.

Why ROCE Is Significant

Changes in earnings and sales indicate shifts in Southwest Gas Holdings's Return on Capital Employed, a measure of yearly pre-tax profit relative to capital employed by a business. Generally, a higher ROCE suggests successful growth of a company and is a sign of higher earnings per share in the future. In Q2, Southwest Gas Holdings posted an ROCE of 0.02%.

It is important to keep in mind ROCE evaluates past performance and is not used as a predictive tool. It is a good measure of a company's recent performance, but several factors could affect earnings and sales in the near future.

ROCE is an important metric for the comparison of similar companies. A relatively high ROCE shows Southwest Gas Holdings is potentially operating at a higher level of efficiency than other companies in its industry. If the company is generating high profits with its current level of capital, some of that money can be reinvested in more capital which will generally lead to higher returns and earnings per share growth.

For Southwest Gas Holdings, the return on capital employed ratio shows the number of assets can actually help the company achieve higher returns, an important note investors will take into account when gauging the payoff from long-term financing strategies.

Upcoming Earnings Estimate

Southwest Gas Holdings reported Q2 earnings per share at $0.43/share, which did not meet analyst predictions of $0.44/share.