Investors Will Want Seadrill's (NYSE:SDRL) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. 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 Seadrill's (NYSE:SDRL) returns on capital, so let's have a look.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Seadrill, this is the formula:

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

0.098 = US$371m ÷ (US$4.1b - US$355m) (Based on the trailing twelve months to March 2024).

So, Seadrill has an ROCE of 9.8%. In absolute terms, that's a low return but it's around the Energy Services industry average of 12%.

See our latest analysis for Seadrill

Above you can see how the current ROCE for Seadrill compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Seadrill .

What Does the ROCE Trend For Seadrill Tell Us?

It's great to see that Seadrill has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 9.8% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 61% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

The Key Takeaway

In summary, it's great to see that Seadrill has been able to turn things around and earn higher returns on lower amounts of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 35% return over the last year. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While Seadrill looks impressive, no company is worth an infinite price. The intrinsic value infographic for SDRL helps visualize whether it is currently trading for a fair price.

While Seadrill 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.