Return On Capital Employed Overview: Western Midstream

Western Midstream WES posted a 22.51% decrease in earnings from Q4. Sales, however, increased by 4.25% over the previous quarter to $674.97 million. Despite the increase in sales this quarter, the decrease in earnings may suggest Western Midstream is not utilizing their capital as effectively as possible. In Q4, Western Midstream earned $310.71 million and total sales reached $647.48 million.

What Is ROCE?

Return on Capital Employed is a measure of yearly pre-tax profit relative to capital employed by a business. Changes in earnings and sales indicate shifts in a company's ROCE. A higher ROCE is generally representative of successful growth of a company and is a sign of higher earnings per share in the future. A low or negative ROCE suggests the opposite. In Q1, Western Midstream posted an ROCE of 0.08%.

Keep in mind, while ROCE is a good measure of a company's recent performance, it is not a highly reliable predictor of a company's earnings or sales in the near future.

ROCE is an important metric for the comparison of similar companies. A relatively high ROCE shows Western Midstream 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 Western Midstream, 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.

Q1 Earnings Insight

Western Midstream reported Q1 earnings per share at $0.44/share, which did not meet analyst predictions of $0.54/share.