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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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 NL Industries (NYSE:NL) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for NL Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.047 = US$26m ÷ (US$586m - US$34m) (Based on the trailing twelve months to September 2024).
Thus, NL Industries has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 10%.
Check out our latest analysis for NL Industries
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating NL Industries' past further, check out this free graph covering NL Industries' past earnings, revenue and cash flow.
The Trend Of ROCE
While there are companies with higher returns on capital out there, we still find the trend at NL Industries promising. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 240% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
In Conclusion...
To bring it all together, NL Industries has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 186% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.