Baker Hughes (NASDAQ:BKR) Is Experiencing Growth In Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Baker Hughes (NASDAQ:BKR) so let's look a bit deeper.

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

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 Baker Hughes:

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

0.11 = US$2.6b ÷ (US$37b - US$13b) (Based on the trailing twelve months to December 2023).

Therefore, Baker Hughes has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Energy Services industry average of 12%.

View our latest analysis for Baker Hughes

In the above chart we have measured Baker Hughes' 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 Baker Hughes for free.

So How Is Baker Hughes' ROCE Trending?

We're pretty happy with how the ROCE has been trending at Baker Hughes. We found that the returns on capital employed over the last five years have risen by 263%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 45% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Baker Hughes may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 35% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From Baker Hughes' ROCE

From what we've seen above, Baker Hughes has managed to increase it's returns on capital all the while reducing it's capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 39% to shareholders. So with that in mind, we think the stock deserves further research.

One more thing to note, we've identified 1 warning sign with Baker Hughes and understanding it should be part of your investment process.

While Baker Hughes 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.