Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So when we looked at Nabors Industries (NYSE:NBR) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Nabors Industries, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.011 = US$44m ÷ (US$4.7b – US$596m) (Based on the trailing twelve months to December 2022).
Therefore, Nabors Industries has an ROCE of 1.1%. Ultimately, that’s a low return and it under-performs the Energy Services industry average of 8.0%.
Check out our latest analysis for Nabors Industries
Above you can see how the current ROCE for Nabors Industries compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering Nabors Industries here for free.
What Does the ROCE Trend For Nabors Industries Tell Us?
It’s great to see that Nabors Industries has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they’re now earning 1.1% on their capital employed. Additionally, the business is utilizing 45% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Nabors Industries could be selling under-performing assets since the ROCE is improving.
Our Take On Nabors Industries’ ROCE
In the end, Nabors Industries has proven it’s capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 54% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company’s current valuation metrics and future prospects seems fitting.
One more thing, we’ve spotted 1 warning sign facing Nabors Industries that you might find interesting.
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.
Valuation is complex, but we’re helping make it simple.
Find out whether Nabors Industries is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
