What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Nabors Industries' (NYSE:NBR) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Nabors Industries is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = US$262m ÷ (US$4.7b - US$529m) (Based on the trailing twelve months to September 2023).
So, Nabors Industries has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 12%.
View our latest analysis for Nabors Industries
In the above chart we have measured Nabors Industries' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Nabors Industries.
What Can We Tell From Nabors Industries' ROCE Trend?
Like most people, we're pleased that Nabors Industries is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 6.2% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 42% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Nabors Industries could be selling under-performing assets since the ROCE is improving.
The Bottom Line On Nabors Industries' ROCE
In a nutshell, we're pleased to see that Nabors Industries has been able to generate higher returns from less capital. Given the stock has declined 43% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
While Nabors Industries looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether NBR is currently trading for a fair price.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.