What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. And in light of that, the trends we’re seeing at Halliburton’s (NYSE:HAL) look very promising so lets take a look.
Understanding 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 Halliburton is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.21 = US$4.1b ÷ (US$25b – US$5.4b) (Based on the trailing twelve months to March 2024).
So, Halliburton has an ROCE of 21%. In absolute terms that’s a great return and it’s even better than the Energy Services industry average of 12%.
See our latest analysis for Halliburton
In the above chart we have measured Halliburton’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free analyst report for Halliburton .
So How Is Halliburton’s ROCE Trending?
Halliburton has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 84% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company’s efficiencies. 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.
Our Take On Halliburton’s ROCE
As discussed above, Halliburton appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with a respectable 62% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it’s worth looking further into this stock because if Halliburton can keep these trends up, it could have a bright future ahead.
On a separate note, we’ve found 2 warning signs for Halliburton you’ll probably want to know about.
Halliburton is not the only stock earning high returns. If you’d like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com