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If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. That's why when we briefly looked at NWF Group's (LON:NWF) ROCE trend, we were pretty happy with what we saw.
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Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for NWF Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = UK£15m ÷ (UK£251m - UK£111m) (Based on the trailing twelve months to November 2024).
So, NWF Group has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Oil and Gas industry.
View our latest analysis for NWF Group
In the above chart we have measured NWF Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering NWF Group for free.
What Can We Tell From NWF Group's ROCE Trend?
While the returns on capital are good, they haven't moved much. The company has consistently earned 10% for the last five years, and the capital employed within the business has risen 37% in that time. 10% is a pretty standard return, and it provides some comfort knowing that NWF Group has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
Another thing to note, NWF Group has a high ratio of current liabilities to total assets of 44%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On NWF Group's ROCE
In the end, NWF Group has proven its ability to adequately reinvest capital at good rates of return. And given the stock has only risen 9.5% over the last five years, we'd suspect the market is beginning to recognize these trends. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.