Nabors Industries (NYSE:NBR) Is Looking To Continue Growing Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Nabors Industries (NYSE:NBR) 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. To calculate this metric for Nabors Industries, this is the formula:

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

0.06 = US$234m ÷ (US$4.5b - US$544m) (Based on the trailing twelve months to June 2023).

Therefore, Nabors Industries has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 12%.

See our latest analysis for Nabors Industries

Above you can see how the current ROCE for Nabors Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

It's great to see that Nabors Industries has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 6.0% on their capital employed. In regards to capital employed, Nabors Industries is using 47% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Nabors Industries could be selling under-performing assets since the ROCE is improving.

Our Take On Nabors Industries' ROCE

From what we've seen above, Nabors Industries has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 54% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to continue researching Nabors Industries, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Nabors 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. 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.