Investors Will Want Schlumberger's (NYSE:SLB) Growth In ROCE To Persist
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Schlumberger's (NYSE:SLB) returns on capital, so let's have a look.
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 Schlumberger:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$3.7b ÷ (US$44b - US$11b) (Based on the trailing twelve months to September 2022).
Therefore, Schlumberger has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.0% generated by the Energy Services industry.
Check out our latest analysis for Schlumberger
Above you can see how the current ROCE for Schlumberger compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Schlumberger.
What Does the ROCE Trend For Schlumberger Tell Us?
You'd find it hard not to be impressed with the ROCE trend at Schlumberger. The data shows that returns on capital have increased by 166% over the trailing five years. The company is now earning US$0.1 per dollar of capital employed. In regards to capital employed, Schlumberger appears to been achieving more with less, since the business is using 46% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
What We Can Learn From Schlumberger's ROCE
In summary, it's great to see that Schlumberger has been able to turn things around and earn higher returns on lower amounts of capital. Astute investors may have an opportunity here because the stock has declined 17% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you want to continue researching Schlumberger, you might be interested to know about the 2 warning signs that our analysis has discovered.
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.
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