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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Nanofilm Technologies International (SGX:MZH) 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)?
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 Nanofilm Technologies International is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.012 = S$6.8m ÷ (S$617m - S$44m) (Based on the trailing twelve months to June 2024).
So, Nanofilm Technologies International has an ROCE of 1.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 1.2%.
View our latest analysis for Nanofilm Technologies International
Above you can see how the current ROCE for Nanofilm Technologies International compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Nanofilm Technologies International for free.
So How Is Nanofilm Technologies International's ROCE Trending?
On the surface, the trend of ROCE at Nanofilm Technologies International doesn't inspire confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 1.2%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
On a side note, Nanofilm Technologies International has done well to pay down its current liabilities to 7.1% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.