In This Article:
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Natural Gas Services Group's (NYSE:NGS) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
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. 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)
0.078 = US$36m ÷ (US$498m - US$34m) (Based on the trailing twelve months to September 2024).
Thus, Natural Gas Services Group has an ROCE of 7.8%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 10%.
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'd like, you can check out the forecasts from the analysts covering Natural Gas Services Group for free.
What Can We Tell From Natural Gas Services Group's ROCE Trend?
Natural Gas Services Group has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 7.8% on its capital. Not only that, but the company is utilizing 63% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
The Bottom Line On Natural Gas Services Group's ROCE
Long story short, we're delighted to see that Natural Gas Services Group's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 170% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.