Newpark Resources (NYSE:NR) Is Looking To Continue Growing Its Returns On Capital
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Newpark Resources (NYSE:NR) looks quite promising in regards to its trends of return on capital.
Understanding 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 Newpark Resources is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.077 = US$39m ÷ (US$662m – US$153m) (Based on the trailing twelve months to September 2023).
Thus, Newpark Resources has an ROCE of 7.7%. In absolute terms, that’s a low return and it also under-performs the Energy Services industry average of 12%. Check out our latest analysis for Newpark Resources ROCE.
What The Trend Of ROCE Can Tell Us
Newpark Resources has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 22%. That’s a very favorable trend because this means that the company is earning more per dollar of capital that’s being employed. Speaking of capital employed, the company is actually utilizing 35% less than it was five years ago, which can be indicative of a business that’s improving its efficiency. Newpark Resources may be selling some assets so it’s worth investigating if the business has plans for future investments to increase returns further still.
What We Can Learn From Newpark Resources’ ROCE
In a nutshell, we’re pleased to see that Newpark Resources has been able to generate higher returns from less capital. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.
If you’d like to know about the risks facing Newpark Resources, we’ve discovered 2 warning signs that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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