North Industries Group Red Arrow (SZSE:000519) Hasn't Managed To Accelerate Its Returns

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. In light of that, when we looked at North Industries Group Red Arrow (SZSE:000519) and its ROCE trend, we weren't exactly thrilled.

What Is 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. To calculate this metric for North Industries Group Red Arrow, this is the formula:

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

0.05 = CN¥564m ÷ (CN¥16b - CN¥4.3b) (Based on the trailing twelve months to September 2024).

Thus, North Industries Group Red Arrow has an ROCE of 5.0%. Even though it's in line with the industry average of 5.2%, it's still a low return by itself.

See our latest analysis for North Industries Group Red Arrow

In the above chart we have measured North Industries Group Red Arrow's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for North Industries Group Red Arrow .

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at North Industries Group Red Arrow. The company has employed 31% more capital in the last five years, and the returns on that capital have remained stable at 5.0%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

In summary, North Industries Group Red Arrow has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 111% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to continue researching North Industries Group Red Arrow, you might be interested to know about the 1 warning sign that our analysis has discovered.

While North Industries Group Red Arrow 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.