Nick Scali (ASX:NCK) Is Reinvesting To Multiply In Value

Simply Wall St
November 02, 2021
Source: Shutterstock

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Nick Scali's (ASX:NCK) trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Nick Scali, this is the formula:

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

0.41 = AU$122m ÷ (AU$437m - AU$136m) (Based on the trailing twelve months to June 2021).

Thus, Nick Scali has an ROCE of 41%. That's a fantastic return and not only that, it outpaces the average of 20% earned by companies in a similar industry.

Check out our latest analysis for Nick Scali

ASX:NCK Return on Capital Employed November 2nd 2021

In the above chart we have measured Nick Scali's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Nick Scali.

What Can We Tell From Nick Scali's ROCE Trend?

We'd be pretty happy with returns on capital like Nick Scali. Over the past five years, ROCE has remained relatively flat at around 41% and the business has deployed 271% more capital into its operations. Now considering ROCE is an attractive 41%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

Our Take On Nick Scali's ROCE

In short, we'd argue Nick Scali has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And long term investors would be thrilled with the 283% return they've received 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.

Nick Scali does have some risks though, and we've spotted 2 warning signs for Nick Scali that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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