Are Investors Overlooking Returns On Capital At New Work (ETR:NWO)?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at New Work's (ETR:NWO) ROCE trend, we were very happy with what we saw.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for New Work:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.38 = €56m ÷ (€328m - €178m) (Based on the trailing twelve months to March 2020).

Therefore, New Work has an ROCE of 38%. That's a fantastic return and not only that, it outpaces the average of 20% earned by companies in a similar industry.

See our latest analysis for New Work

In the above chart we have a measured New Work'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 New Work here for free.

What Does the ROCE Trend For New Work Tell Us?

New Work deserves to be commended in regards to it's returns. The company has employed 161% more capital in the last five years, and the returns on that capital have remained stable at 38%. Returns like this are the envy of most businesses and given they have repeatedly reinvested at these rates, that's even better. If New Work can keep this up, we'd be very optimistic about its future.

On a side note, New Work's current liabilities are still rather high at 54% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On New Work's ROCE

In short, we'd argue New Work has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has followed suit returning a meaningful 92% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a separate note, we've found 1 warning sign for New Work you'll probably want to know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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