Why The 23% Return On Capital At North West (TSE:NWC) Should Have Your Attention

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. 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 looked at the ROCE trend of North West (TSE:NWC) we really liked what we saw.

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. Analysts use this formula to calculate it for North West:

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

0.23 = CA$212m ÷ (CA$1.2b - CA$292m) (Based on the trailing twelve months to October 2020).

So, North West has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Consumer Retailing industry average of 11%.

Check out our latest analysis for North West

Above you can see how the current ROCE for North West compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering North West here for free.

What Can We Tell From North West's ROCE Trend?

North West is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 23%. Basically the business is earning more per dollar of capital invested and in addition to that, 49% more capital is being employed now too. So we're very much inspired by what we're seeing at North West thanks to its ability to profitably reinvest capital.

The Key Takeaway

All in all, it's terrific to see that North West is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 50% return over the last five years. In light of that, we think it's worth looking further into this stock because if North West can keep these trends up, it could have a bright future ahead.

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

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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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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