We're Watching These Trends At Nabaltec (ETR:NTG)

Did you know there are some financial metrics that can provide clues of a potential 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. However, after briefly looking over the numbers, we don't think Nabaltec (ETR:NTG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on Nabaltec is:

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

0.03 = €6.1m ÷ (€225m - €20m) (Based on the trailing twelve months to September 2020).

So, Nabaltec has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.4%.

View our latest analysis for Nabaltec

Above you can see how the current ROCE for Nabaltec compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Nabaltec.

What Does the ROCE Trend For Nabaltec Tell Us?

On the surface, the trend of ROCE at Nabaltec doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.0% from 7.6% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Nabaltec has done well to pay down its current liabilities to 8.8% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Nabaltec's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Nabaltec have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 131% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Nabaltec does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

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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