The Return Trends At Canadian Natural Resources (TSE:CNQ) Look Promising

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. With that in mind, we've noticed some promising trends at Canadian Natural Resources (TSE:CNQ) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Canadian Natural Resources:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.15 = CA$9.8b ÷ (CA$75b - CA$8.6b) (Based on the trailing twelve months to June 2023).

So, Canadian Natural Resources has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Oil and Gas industry average of 13%.

See our latest analysis for Canadian Natural Resources

Above you can see how the current ROCE for Canadian Natural Resources compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Canadian Natural Resources here for free.

What The Trend Of ROCE Can Tell Us

Canadian Natural Resources is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 141% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On Canadian Natural Resources' ROCE

To bring it all together, Canadian Natural Resources has done well to increase the returns it's generating from its capital employed. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Canadian Natural Resources can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with Canadian Natural Resources and understanding this should be part of your investment process.

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.

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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.