We Like These Underlying Return On Capital Trends At North Industries Group Red Arrow (SZSE:000519)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, North Industries Group Red Arrow (SZSE:000519) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on North Industries Group Red Arrow is:

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

0.07 = CN¥792m ÷ (CN¥15b - CN¥3.9b) (Based on the trailing twelve months to March 2024).

Thus, North Industries Group Red Arrow has an ROCE of 7.0%. On its own that's a low return, but compared to the average of 5.6% generated by the Machinery industry, it's much better.

Check out our latest analysis for North Industries Group Red Arrow

Above you can see how the current ROCE for North Industries Group Red Arrow 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 Industries Group Red Arrow for free.

What The Trend Of ROCE Can 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 7.0%. Basically the business is earning more per dollar of capital invested and in addition to that, 35% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line On North Industries Group Red Arrow's ROCE

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 82% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

While North Industries Group Red Arrow looks impressive, no company is worth an infinite price. The intrinsic value infographic for 000519 helps visualize whether it is currently trading for a fair price.

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.

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