Returns Are Gaining Momentum At Schlumberger (NYSE:SLB)
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Schlumberger (NYSE:SLB) looks quite promising in regards to its trends of return on capital.
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 Schlumberger is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = US$4.2b ÷ (US$43b - US$12b) (Based on the trailing twelve months to December 2022).
Therefore, Schlumberger has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Energy Services industry average of 7.7% it's much better.
Check out our latest analysis for Schlumberger
In the above chart we have measured Schlumberger's 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 Schlumberger.
How Are Returns Trending?
We're pretty happy with how the ROCE has been trending at Schlumberger. The figures show that over the last five years, returns on capital have grown by 159%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 45% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Schlumberger may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Bottom Line
From what we've seen above, Schlumberger has managed to increase it's returns on capital all the while reducing it's capital base. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.
If you want to continue researching Schlumberger, you might be interested to know about the 3 warning signs that our analysis has discovered.
While Schlumberger isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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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