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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at NVE's (NASDAQ:NVEC) look very promising so lets take a look.
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. To calculate this metric for NVE, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = US$17m ÷ (US$66m - US$932k) (Based on the trailing twelve months to September 2024).
Thus, NVE has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 8.6%.
View our latest analysis for NVE
Historical performance is a great place to start when researching a stock so above you can see the gauge for NVE's ROCE against it's prior returns. If you're interested in investigating NVE's past further, check out this free graph covering NVE's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
NVE has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 50%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 20% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
The Bottom Line On NVE's ROCE
From what we've seen above, NVE has managed to increase it's returns on capital all the while reducing it's capital base. And with a respectable 61% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.
Like most companies, NVE does come with some risks, and we've found 1 warning sign that you should be aware of.