Stock Analysis

Returns At North Industries Group Red Arrow (SZSE:000519) Are On The Way Up

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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 when we looked at North Industries Group Red Arrow (SZSE:000519) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)

0.082 = CN¥925m ÷ (CN¥16b - CN¥4.3b) (Based on the trailing twelve months to December 2023).

Thus, North Industries Group Red Arrow has an ROCE of 8.2%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 6.1%.

View our latest analysis for North Industries Group Red Arrow

SZSE:000519 Return on Capital Employed April 21st 2024

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'd like, you can check out the forecasts from the analysts covering North Industries Group Red Arrow for free.

What Does the ROCE Trend For North Industries Group Red Arrow Tell Us?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 8.2%. Basically the business is earning more per dollar of capital invested and in addition to that, 36% more capital is being employed now too. So we're very much inspired by what we're seeing at North Industries Group Red Arrow thanks to its ability to profitably reinvest capital.

The Key Takeaway

All in all, it's terrific to see that North Industries Group Red Arrow 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 62% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, North Industries Group Red Arrow does come with some risks, and we've found 1 warning sign that you should be aware of.

While North Industries Group Red Arrow isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Valuation is complex, but we're helping make it simple.

Find out whether North Industries Group Red Arrow is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.