New Work (ETR:NWO) Might Become A Compounding Machine

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 ran our eye over New Work's (ETR:NWO) trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on New Work is:

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

0.34 = €74m ÷ (€379m - €161m) (Based on the trailing twelve months to September 2021).

Therefore, New Work has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Interactive Media and Services industry average of 9.7%.

View our latest analysis for New Work

In the above chart we have measured New Work'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 New Work here for free.

What Does the ROCE Trend For New Work Tell Us?

We'd be pretty happy with returns on capital like New Work. The company has employed 164% more capital in the last five years, and the returns on that capital have remained stable at 34%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

On a side note, New Work's current liabilities are still rather high at 42% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On New Work's ROCE

New Work has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And given the stock has only risen 14% over the last five years, we'd suspect the market is beginning to recognize these trends. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

On a final note, we've found 3 warning signs for New Work that we think you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.