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When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Northern Bear (LON:NTBR), so let's see why.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Northern Bear is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.039 = UK£971k ÷ (UK£38m - UK£13m) (Based on the trailing twelve months to September 2021).
Thus, Northern Bear has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 11%.
View our latest analysis for Northern Bear
Historical performance is a great place to start when researching a stock so above you can see the gauge for Northern Bear's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Northern Bear, check out these free graphs here.
The Trend Of ROCE
In terms of Northern Bear's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 10.0%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Northern Bear becoming one if things continue as they have.
What We Can Learn From Northern Bear's ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 32% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.