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Returns On Capital - An Important Metric For NL Industries (NYSE:NL)

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What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 NL Industries' (NYSE:NL) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on NL Industries is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.016 = US$8.0m ÷ (US$539m - US$27m) (Based on the trailing twelve months to March 2020).

So, NL Industries has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.8%.

Check out our latest analysis for NL Industries

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Historical performance is a great place to start when researching a stock so above you can see the gauge for NL Industries' ROCE against it's prior returns. If you're interested in investigating NL Industries' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For NL Industries Tell Us?

Shareholders will be relieved that NL Industries has broken into profitability. The company now earns 1.6% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by NL Industries has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line

To sum it up, NL Industries is collecting higher returns from the same amount of capital, and that's impressive. Given the stock has declined 22% in the last five years, there could be a chance of a good investment here if the valuation makes sense. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing, we've spotted 2 warning signs facing NL Industries that you might find interesting.

While NL 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.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.