There are some key trends we need to look out for when identifying the next multi-bagger. Ideally, a company will exhibit two trends: first, a growing return on the capital employed (ROCE) and secondly an increasing Crowd of the capital employed. Simply put, these types of companies are compound interest machines, meaning that they continually reinvest their profits at ever higher returns. So when we looked at Natural Gas Services Group (NYSE:NGS) and its ROCE trend, we really liked what we saw.
Return on Capital Employed (ROCE): What is it?
Just to clarify in case you’re not sure, ROCE is a ratio that evaluates how much profit before tax (as a percentage) a company generates with the capital invested in its business. Analysts use this formula to calculate it for Natural Gas Services Group:
Return on capital = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.053 = $25 million ÷ ($486 million – $24 million) (Based on the last twelve months to March 2024).
Therefore, The Natural Gas Services Group has a ROCE of 5.3%. Ultimately, this is a low return and is below the industry average for energy services of 11%.
Check out our latest analysis for Natural Gas Services Group
Above you can see how the current ROCE for Natural Gas Services Group compares to previous returns on capital, but there is only so much to infer from the past. If you want, you can see the analyst forecasts that Natural Gas Services Group has for free.
So how is the ROCE of the Natural Gas Services Group developing?
Natural Gas Services Group recently broke even, so its past investments appear to be paying off. Five years ago, the company was losing money, but now it’s yielding 5.3%, which is pretty good to watch. And like most companies trying to stay in the black, Natural Gas Services Group is, not surprisingly, using 56% more capital than it was five years ago. We like this trend because it tells us that the company has lucrative reinvestment opportunities, and if this trend continues, it could lead to highly successful performance.
What we can learn from Natural Gas Services Group’s ROCE
Overall, Natural Gas Services Group gets a big plus from us, largely because it is now profitable and reinvesting in its business. With the stock having returned a solid 71% to shareholders over the past five years, it’s fair to say investors are starting to see these changes. With that in mind, we think this stock is worth taking a closer look at, because if Natural Gas Services Group can maintain these trends, it could have a bright future ahead of it.
If you would like to explore the Natural Gas Services Group further, you may be interested in the 2 warning signs This is what our analysis has shown.
If you want to look for solid companies with high returns, check out this free List of companies with good balance sheets and impressive return on equity.
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