Returns Are Gaining Momentum At NL Industries (NYSE:NL)
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. With that in mind, we've noticed some promising trends at NL Industries (NYSE:NL) so let's look a bit deeper.
What is 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 NL Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.014 = US$7.6m ÷ (US$575m - US$28m) (Based on the trailing twelve months to June 2021).
Thus, NL Industries has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 7.9%.
Check out our latest analysis for NL Industries
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.
The Trend Of ROCE
The fact that NL Industries is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 1.4% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, NL Industries is utilizing 66% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
In Conclusion...
In summary, it's great to see that NL Industries has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a solid 97% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
NL Industries does have some risks though, and we've spotted 2 warning signs for NL Industries that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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