There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Neochim AD (BUL:3NB) and its trend of ROCE, we really liked 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 Neochim AD:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = лв11m ÷ (лв123m - лв21m) (Based on the trailing twelve months to September 2020).
Thus, Neochim AD has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 9.3%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Neochim AD's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Neochim AD, check out these free graphs here.
What Can We Tell From Neochim AD's ROCE Trend?
Neochim AD is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 136% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Bottom Line On Neochim AD's ROCE
To bring it all together, Neochim AD has done well to increase the returns it's generating from its capital employed. Given the stock has declined 35% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
On a separate note, we've found 1 warning sign for Neochim AD you'll probably want to know about.
While Neochim AD isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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