Nabors Industries (NYSE:NBR) Is Doing The Right Things To Multiply Its Share Price
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. 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)
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. The formula for this calculation on Nabors Industries is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.06 = US$234m ÷ (US$4.5b - US$544m) (Based on the trailing twelve months to June 2023).
Thus, Nabors Industries has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 11%.
Check out our latest analysis for Nabors Industries
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 here for free.
What Can We Tell From Nabors Industries' ROCE Trend?
It's great to see that Nabors Industries has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 6.0% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 47% 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
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. Given the stock has declined 58% 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.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
While Nabors Industries may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
