Novabase S.G.P.S (FRA:NVQ) Is Looking To Continue Growing Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Novabase S.G.P.S' (FRA:NVQ) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Novabase S.G.P.S:

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

0.067 = €7.5m ÷ (€177m - €65m) (Based on the trailing twelve months to December 2023).

Therefore, Novabase S.G.P.S has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the IT industry average of 9.6%.

View our latest analysis for Novabase S.G.P.S

Historical performance is a great place to start when researching a stock so above you can see the gauge for Novabase S.G.P.S' ROCE against it's prior returns. If you'd like to look at how Novabase S.G.P.S has performed in the past in other metrics, you can view this free graph of Novabase S.G.P.S' past earnings, revenue and cash flow.

How Are Returns Trending?

Novabase S.G.P.S has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 72% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In Conclusion...

In summary, we're delighted to see that Novabase S.G.P.S has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 286% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we found 3 warning signs for Novabase S.G.P.S (1 shouldn't be ignored) you should be aware of.

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com