Here's What To Make Of Baker Hughes' (NASDAQ:BKR) Decelerating Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Baker Hughes (NASDAQ:BKR) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Baker Hughes:

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

0.065 = US$1.7b ÷ (US$35b - US$9.1b) (Based on the trailing twelve months to March 2022).

Therefore, Baker Hughes has an ROCE of 6.5%. On its own that's a low return, but compared to the average of 5.2% generated by the Energy Services industry, it's much better.

Check out our latest analysis for Baker Hughes

Above you can see how the current ROCE for Baker Hughes 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 Baker Hughes here for free.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Baker Hughes. Over the past five years, ROCE has remained relatively flat at around 6.5% and the business has deployed 52% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

In conclusion, Baker Hughes has been investing more capital into the business, but returns on that capital haven't increased. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One more thing to note, we've identified 3 warning signs with Baker Hughes and understanding them 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.