If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in NL Industries' (NYSE:NL) returns on capital, so let's have a look.
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. The formula for this calculation on NL Industries is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = US$12m ÷ (US$615m - US$28m) (Based on the trailing twelve months to March 2022).
So, NL Industries has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 8.3%.
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.
What Does the ROCE Trend For NL Industries Tell Us?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 2.0%. Basically the business is earning more per dollar of capital invested and in addition to that, 59% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line On NL Industries' ROCE
To sum it up, NL Industries has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 39% to shareholders. So with that in mind, we think the stock deserves further research.
If you'd like to know more about NL Industries, we've spotted 2 warning signs, and 1 of them is significant.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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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