What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think NL Industries (NYSE:NL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for NL Industries, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.024 = US$13m ÷ (US$569m - US$25m) (Based on the trailing twelve months to March 2024).

Thus, NL Industries has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 9.8%.

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'd like to look at how NL Industries has performed in the past in other metrics, you can view this free graph of NL Industries' past earnings, revenue and cash flow.

So How Is NL Industries' ROCE Trending?

Things have been pretty stable at NL Industries, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect NL Industries to be a multi-bagger going forward.

The Bottom Line On NL Industries' ROCE

In summary, NL Industries isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 67% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing, we've spotted 2 warning signs facing NL Industries that you might find interesting.