Will Nick Scali (ASX:NCK) Multiply In Value Going Forward?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So while Nick Scali (ASX:NCK) has a high ROCE right now, lets see what we can decipher from how returns are changing.

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. 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)

0.31 = AU$88m ÷ (AU$408m - AU$120m) (Based on the trailing twelve months to December 2020).

So, Nick Scali has an ROCE of 31%. 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 Nick Scali

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, you can check out the forecasts from the analysts covering Nick Scali here for free.

What Does the ROCE Trend For Nick Scali Tell Us?

When we looked at the ROCE trend at Nick Scali, we didn't gain much confidence. To be more specific, while the ROCE is still high, it's fallen from 40% where it was five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Nick Scali is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 230% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Nick Scali does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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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