In This Article:
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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Having said that, while the ROCE is currently high for Nichols (LON:NICL), we aren't jumping out of our chairs because returns are decreasing.
What Is 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. The formula for this calculation on Nichols is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = UK£27m ÷ (UK£136m - UK£33m) (Based on the trailing twelve months to June 2024).
Thus, Nichols has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Beverage industry average of 16%.
View our latest analysis for Nichols
Above you can see how the current ROCE for Nichols 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 Nichols .
How Are Returns Trending?
Things have been pretty stable at Nichols, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So while the current operations are delivering respectable returns, unless capital employed increases we'd be hard-pressed to believe it's a multi-bagger going forward. With fewer investment opportunities, it makes sense that Nichols has been paying out a decent 53% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.
Our Take On Nichols' ROCE
While Nichols has impressive profitability from its capital, it isn't increasing that amount of capital. And with the stock having returned a mere 11% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.