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What Do The Returns At Golar LNG (NASDAQ:GLNG) Mean Going Forward?

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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. 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 Golar LNG's (NASDAQ:GLNG) returns on capital, so let's have a look.

What is 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. Analysts use this formula to calculate it for Golar LNG:

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

0.058 = US$172m ÷ (US$4.4b - US$1.4b) (Based on the trailing twelve months to June 2020).

So, Golar LNG has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 8.8%.

See our latest analysis for Golar LNG

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In the above chart we have measured Golar LNG's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Golar LNG here for free.

What Does the ROCE Trend For Golar LNG Tell Us?

Like most people, we're pleased that Golar LNG is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 5.8% which is no doubt a relief for some early shareholders. In regards to capital employed, Golar LNG is using 23% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 32% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Key Takeaway

From what we've seen above, Golar LNG has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 47% 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.

One more thing to note, we've identified 2 warning signs with Golar LNG and understanding these should be part of your investment process.

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. 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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