Yahoo Finance Returns On Capital Are Showing Encouraging Signs At Schlumberger (NYSE:SLB)
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Schlumberger's (NYSE:SLB) returns on capital, so let's have a look.
What is 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. Analysts use this formula to calculate it for Schlumberger:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = US$3.0b ÷ (US$42b - US$11b) (Based on the trailing twelve months to March 2022).
Thus, Schlumberger has an ROCE of 9.5%. On its own that's a low return, but compared to the average of 5.4% generated by the Energy Services industry, it's much better.
See our latest analysis for Schlumberger
In the above chart we have measured Schlumberger'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 Schlumberger here for free.
The Trend Of ROCE
You'd find it hard not to be impressed with the ROCE trend at Schlumberger. We found that the returns on capital employed over the last five years have risen by 184%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 50% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
In Conclusion...
In summary, it's great to see that Schlumberger has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 32% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
If you want to continue researching Schlumberger, you might be interested to know about the 4 warning signs that our analysis has discovered.
While Schlumberger may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
