If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So on that note, Schlumberger (NYSE:SLB) looks quite promising in regards to its trends of return on capital.
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. To calculate this metric for Schlumberger, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$3.3b ÷ (US$43b - US$11b) (Based on the trailing twelve months to June 2022).
Therefore, Schlumberger has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 5.8% generated by the Energy Services industry.
Above you can see how the current ROCE for Schlumberger 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.
What Can We Tell From Schlumberger's ROCE Trend?
Schlumberger has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 172%. The company is now earning US$0.1 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 47% less capital than it was five years ago. Schlumberger may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
The Bottom Line
From what we've seen above, Schlumberger has managed to increase it's returns on capital all the while reducing it's capital base. Astute investors may have an opportunity here because the stock has declined 35% in the last five years. 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 2 warning signs that our analysis has discovered.
While Schlumberger 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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