Yahoo Finance NOV (NYSE:NOV) Shareholders Will Want The ROCE Trajectory To Continue
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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in NOV's (NYSE:NOV) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for NOV, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.005 = US$38m ÷ (US$9.7b - US$2.2b) (Based on the trailing twelve months to June 2022).
Therefore, NOV has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 5.6%.
See our latest analysis for NOV
In the above chart we have measured NOV'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 NOV.
The Trend Of ROCE
It's great to see that NOV has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 0.5% which is no doubt a relief for some early shareholders. In regards to capital employed, NOV is using 58% 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.
The Bottom Line On NOV's ROCE
In a nutshell, we're pleased to see that NOV has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 42% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.
On a final note, we've found 1 warning sign for NOV that we think you should be aware of.
While NOV 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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