Will the Promising Trends At NRW Holdings (ASX:NWH) Continue?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at NRW Holdings (ASX:NWH) so let's look a bit deeper.

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 NRW Holdings:

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

0.16 = AU$115m ÷ (AU$1.2b - AU$507m) (Based on the trailing twelve months to June 2020).

So, NRW Holdings has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Construction industry average of 15%.

Check out our latest analysis for NRW Holdings

Above you can see how the current ROCE for NRW Holdings 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 report on analyst forecasts for the company.

What Does the ROCE Trend For NRW Holdings Tell Us?

NRW Holdings has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 16% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, NRW Holdings is utilizing 437% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 42%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Key Takeaway

Long story short, we're delighted to see that NRW Holdings' reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 6,377% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 2 warning signs with NRW Holdings and understanding these should be part of your investment process.

While NRW Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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