Yahoo Finance We Like These Underlying Return On Capital Trends 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? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Schlumberger (NYSE:SLB) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Schlumberger:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$3.7b ÷ (US$44b - US$11b) (Based on the trailing twelve months to September 2022).
Therefore, Schlumberger has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Energy Services industry average of 7.0% it's much better.
View 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
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 165%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Schlumberger appears to been achieving more with less, since the business is using 46% less capital to run its operation. 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 Key Takeaway
In the end, Schlumberger has proven it's capital allocation skills are good with those higher returns from less amount of capital. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Like most companies, Schlumberger does come with some risks, and we've found 2 warning signs that you should be aware of.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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