Investors Will Want Schlumberger's (NYSE:SLB) Growth In ROCE To Persist

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Schlumberger's (NYSE:SLB) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Schlumberger is:

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

0.15 = US$5.0b ÷ (US$45b - US$12b) (Based on the trailing twelve months to June 2023).

So, Schlumberger has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Energy Services industry average of 12% it's much better.

Check out our latest analysis for Schlumberger

Above you can see how the current ROCE for Schlumberger 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 Can We Tell From Schlumberger's ROCE Trend?

You'd find it hard not to be impressed with the ROCE trend at Schlumberger. The data shows that returns on capital have increased by 155% over the trailing five years. The company is now earning US$0.2 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 41% less capital than it was five years ago. Schlumberger may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Key Takeaway

In a nutshell, we're pleased to see that Schlumberger has been able to generate higher returns from less capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 12% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Like most companies, Schlumberger does come with some risks, and we've found 3 warning signs that you should be aware of.

While Schlumberger 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.