We're Watching These Trends At National Fuel Gas (NYSE:NFG)
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. In light of that, when we looked at National Fuel Gas (NYSE:NFG) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What is it?
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. The formula for this calculation on National Fuel Gas is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = US$455m ÷ (US$7.0b - US$460m) (Based on the trailing twelve months to September 2020).
Therefore, National Fuel Gas has an ROCE of 7.0%. On its own that's a low return, but compared to the average of 5.6% generated by the Gas Utilities industry, it's much better.
Check out our latest analysis for National Fuel Gas
Above you can see how the current ROCE for National Fuel Gas compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is National Fuel Gas' ROCE Trending?
There hasn't been much to report for National Fuel Gas' returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at National Fuel Gas in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. This probably explains why National Fuel Gas is paying out 44% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
What We Can Learn From National Fuel Gas' ROCE
In a nutshell, National Fuel Gas has been trudging along with the same returns from the same amount of capital over the last five years. And with the stock having returned a mere 19% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One more thing: We've identified 3 warning signs with National Fuel Gas (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.
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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