Returns On Capital Are Showing Encouraging Signs At Neo Performance Materials (TSE:NEO)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Neo Performance Materials (TSE:NEO) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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 Neo Performance Materials:

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

0.12 = US$66m ÷ (US$638m - US$107m) (Based on the trailing twelve months to September 2022).

Thus, Neo Performance Materials has an ROCE of 12%. In isolation, that's a pretty standard return but against the Chemicals industry average of 17%, it's not as good.

View our latest analysis for Neo Performance Materials

Above you can see how the current ROCE for Neo Performance Materials compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Neo Performance Materials.

How Are Returns Trending?

Neo Performance Materials has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 94% whilst employing roughly the same amount of capital. 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. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Key Takeaway

To sum it up, Neo Performance Materials is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 11% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Like most companies, Neo Performance Materials does come with some risks, and we've found 2 warning signs that you should be aware of.

While Neo Performance Materials 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.