Natural Gas Services Group (NYSE:NGS) Is Doing The Right Things To Multiply Its Share Price

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. So when we looked at Natural Gas Services Group (NYSE:NGS) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Natural Gas Services Group is:

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

0.066 = US$30m ÷ (US$489m - US$30m) (Based on the trailing twelve months to June 2024).

Therefore, Natural Gas Services Group has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 11%.

View our latest analysis for Natural Gas Services Group

Above you can see how the current ROCE for Natural Gas Services Group 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 analyst report for Natural Gas Services Group .

So How Is Natural Gas Services Group's ROCE Trending?

The fact that Natural Gas Services Group is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 6.6% on its capital. And unsurprisingly, like most companies trying to break into the black, Natural Gas Services Group is utilizing 54% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

The Bottom Line On Natural Gas Services Group's ROCE

Overall, Natural Gas Services Group gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a staggering 106% 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 Natural Gas Services Group can keep these trends up, it could have a bright future ahead.

On a final note, we found 3 warning signs for Natural Gas Services Group (2 are potentially serious) you should be aware of.

While Natural Gas Services Group 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.