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. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Nexus’ (ETR:NXU) returns on capital, so let’s have a look.
What is Return On Capital Employed (ROCE)?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Nexus:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.083 = €13m ÷ (€221m – €65m) (Based on the trailing twelve months to June 2020).
Therefore, Nexus has an ROCE of 8.3%. On its own, that’s a low figure but it’s around the 9.8% average generated by the Healthcare Services industry.
Above you can see how the current ROCE for Nexus compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
While in absolute terms it isn’t a high ROCE, it’s promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 8.3%. The amount of capital employed has increased too, by 50%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that’s why we’re impressed.
The Bottom Line
All in all, it’s terrific to see that Nexus is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 191% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
Nexus does have some risks though, and we’ve spotted 1 warning sign for Nexus that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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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