Returns On Capital At Canadian Natural Resources (TSE:CNQ) Paint An Interesting Picture

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Canadian Natural Resources (TSE:CNQ) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Canadian Natural Resources:

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

0.025 = CA$1.7b ÷ (CA$75b - CA$4.9b) (Based on the trailing twelve months to June 2020).

Thus, Canadian Natural Resources has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 5.8%.

View our latest analysis for Canadian Natural Resources

In the above chart we have measured Canadian Natural Resources' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Canadian Natural Resources.

What Can We Tell From Canadian Natural Resources' ROCE Trend?

On the surface, the trend of ROCE at Canadian Natural Resources doesn't inspire confidence. Around five years ago the returns on capital were 5.1%, but since then they've fallen to 2.5%. However it looks like Canadian Natural Resources might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that Canadian Natural Resources is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 16% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Canadian Natural Resources has the makings of a multi-bagger.

If you want to know some of the risks facing Canadian Natural Resources we've found 5 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

This article by Simply Wall St is general in nature. 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.

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