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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at NSL (SGX:N02) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for NSL:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.04 = S$19m ÷ (S$607m - S$126m) (Based on the trailing twelve months to December 2022).
So, NSL has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 7.6%.
Check out our latest analysis for NSL
Historical performance is a great place to start when researching a stock so above you can see the gauge for NSL's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of NSL, check out these free graphs here.
How Are Returns Trending?
We're delighted to see that NSL is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 21% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. NSL could be selling under-performing assets since the ROCE is improving.
What We Can Learn From NSL's ROCE
In a nutshell, we're pleased to see that NSL has been able to generate higher returns from less capital. And since the stock has fallen 16% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
Like most companies, NSL does come with some risks, and we've found 2 warning signs that you should be aware of.
While NSL isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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