Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at National Fuel Gas (NYSE:NFG) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for National Fuel Gas, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = US$751m ÷ (US$8.7b - US$728m) (Based on the trailing twelve months to March 2024).
Thus, National Fuel Gas has an ROCE of 9.5%. In absolute terms, that's a low return, but it's much better than the Gas Utilities industry average of 5.9%.
Above you can see how the current ROCE for National Fuel Gas compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for National Fuel Gas .
What The Trend Of ROCE Can Tell Us
In terms of National Fuel Gas' historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 9.5% and the business has deployed 36% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line On National Fuel Gas' ROCE
As we've seen above, National Fuel Gas' returns on capital haven't increased but it is reinvesting in the business. And investors may be recognizing these trends since the stock has only returned a total of 15% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
National Fuel Gas does have some risks though, and we've spotted 2 warning signs for National Fuel Gas that you might be interested in.
While National Fuel Gas isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.