In This Article:
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So while Nick Scali (ASX:NCK) has a high ROCE right now, lets see what we can decipher from how returns are changing.
Understanding 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 Nick Scali:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.28 = AU$118m ÷ (AU$616m - AU$190m) (Based on the trailing twelve months to June 2022).
Thus, Nick Scali has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 19%.
Check out our latest analysis for Nick Scali
In the above chart we have measured Nick Scali'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 report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
In terms of Nick Scali's historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 55% where it was five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On Nick Scali's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Nick Scali. And the stock has done incredibly well with a 122% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
Like most companies, Nick Scali does come with some risks, and we've found 1 warning sign that you should be aware of.
Nick Scali 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.