Benzinga | Feb 23, 2021 10:07AM EST

Return On Capital Employed Overview: SM Energy

During Q4, SM Energy (NYSE:SM) brought in sales totaling $320.29 million. However, earnings decreased 50.7%, resulting in a loss of $19.35 million. In Q3, SM Energy brought in $281.01 million in sales but lost $39.26 million in earnings.

Why ROCE Is Significant

Changes in earnings and sales indicate shifts in SM Energy'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 Q4, SM Energy posted an ROCE of -0.01%.

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 SM Energy 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.

In SM Energy's case, the ROCE ratio shows the amount of assets may not be helping the company achieve higher returns. Investors may take this into account before making any long-term financial decisions.

Q4 Earnings Insight

SM Energy reported Q4 earnings per share at $0.02/share, which did not meet analyst predictions of $0.05/share.