Returns On Capital Are Showing Encouraging Signs At NL Industries (NYSE:NL)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in NL Industries' (NYSE:NL) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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 NL Industries, this is the formula:

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

0.0065 = US$3.4m ÷ (US$548m - US$28m) (Based on the trailing twelve months to December 2020).

Thus, NL Industries has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 9.5%.

See our latest analysis for NL Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for NL Industries' ROCE against it's prior returns. If you'd like to look at how NL Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From NL Industries' ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 0.7%. Basically the business is earning more per dollar of capital invested and in addition to that, 60% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what NL Industries has. Since the stock has returned a staggering 188% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if NL Industries can keep these trends up, it could have a bright future ahead.

Like most companies, NL Industries does come with some risks, and we've found 4 warning signs that you should be aware of.

While NL Industries 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. 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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