If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Nabors Industries (NYSE:NBR) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Nabors Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = US$256m ÷ (US$4.6b - US$602m) (Based on the trailing twelve months to March 2024).
Thus, Nabors Industries has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 12%.
Above you can see how the current ROCE for Nabors Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Nabors Industries for free.
What Does the ROCE Trend For Nabors Industries Tell Us?
We're delighted to see that Nabors Industries is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 6.3% on their capital employed. Additionally, the business is utilizing 43% 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
From what we've seen above, Nabors Industries has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 30% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for NBR that compares the share price and estimated value.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.