Does Nordwest Handel (FRA:NWX) Have The Makings Of A Multi-Bagger?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Nordwest Handel's (FRA:NWX) returns on capital, so let's have a look.

What is 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 Nordwest Handel, this is the formula:

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

0.10 = €10m ÷ (€340m - €241m) (Based on the trailing twelve months to September 2020).

So, Nordwest Handel has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Trade Distributors industry average of 9.4%.

See our latest analysis for Nordwest Handel

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Nordwest Handel has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Nordwest Handel's ROCE Trending?

Investors would be pleased with what's happening at Nordwest Handel. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 10%. Basically the business is earning more per dollar of capital invested and in addition to that, 21% more capital is being employed now too. So we're very much inspired by what we're seeing at Nordwest Handel thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Nordwest Handel has a current liabilities to total assets ratio of 71%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Nordwest Handel's ROCE

To sum it up, Nordwest Handel has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 99% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Nordwest Handel can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Nordwest Handel, we've discovered 2 warning signs that you should be aware of.

While Nordwest Handel 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. 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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