Nabors Industries (NYSE:NBR) Shareholders Will Want The ROCE Trajectory To Continue
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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, we've noticed some promising trends at Nabors Industries (NYSE:NBR) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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).
Therefore, Nabors Industries has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 12%.
See 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.
The Trend Of ROCE
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 6.2% on their capital employed. 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. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
The Key Takeaway
In the end, Nabors Industries has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 48% 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.
