Benzinga | Oct 14, 2020 08:46AM EDT

Looking Into Concho Resources's Return On Capital Employed

During Q2, Concho Resources (NYSE:CXO) brought in sales totaling $474.00 million. However, earnings decreased 99.18%, resulting in a loss of $101.00 million. In Q1, Concho Resources brought in $922.00 million in sales but lost $12.37 billion in earnings.

Why ROCE Is Significant

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 Q2, Concho Resources posted an ROCE of -0.01%.

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 Concho Resources 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 Concho Resources'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.

Q2 Earnings Insight

Concho Resources reported Q2 earnings per share at $1.13/share, which beat analyst predictions of $0.63/share.