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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Nanoco Group's (LON:NANO) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Nanoco Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0011 = UK£25k ÷ (UK£31m - UK£8.1m) (Based on the trailing twelve months to July 2024).
Thus, Nanoco Group has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 12%.
Check out our latest analysis for Nanoco Group
Above you can see how the current ROCE for Nanoco Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Nanoco Group .
So How Is Nanoco Group's ROCE Trending?
The fact that Nanoco Group is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 0.1% which is a sight for sore eyes. Not only that, but the company is utilizing 142% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
Our Take On Nanoco Group's ROCE
In summary, it's great to see that Nanoco Group has managed to break into profitability and is continuing to reinvest in its business. Since the stock has only returned 15% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
If you want to know some of the risks facing Nanoco Group we've found 4 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.