Yahoo Finance Nabors Industries' (NYSE:NBR) Returns On Capital Are Heading Higher
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Nabors Industries (NYSE:NBR) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Nabors Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.011 = US$44m ÷ (US$4.7b - US$596m) (Based on the trailing twelve months to December 2022).
Therefore, Nabors Industries has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 7.7%.
Check out 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
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 1.1% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 45% 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. This could potentially mean that the company is selling some of its assets.
What We Can Learn From Nabors Industries' ROCE
In the end, Nabors Industries has proven it's capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 53% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
One more thing, we've spotted 1 warning sign facing Nabors Industries that you might find interesting.
While Nabors Industries isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
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