Returns On Capital Are Showing Encouraging Signs At Novabase S.G.P.S (FRA:NVQ)

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Novabase S.G.P.S (FRA:NVQ) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Novabase S.G.P.S is:

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

0.092 = €8.7m ÷ (€169m - €75m) (Based on the trailing twelve months to June 2021).

So, Novabase S.G.P.S has an ROCE of 9.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.4%.

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

Above you can see how the current ROCE for Novabase S.G.P.S compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Novabase S.G.P.S here for free.

The Trend Of ROCE

Novabase S.G.P.S has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 108% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a separate but related note, it's important to know that Novabase S.G.P.S has a current liabilities to total assets ratio of 44%, 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.

What We Can Learn From Novabase S.G.P.S' ROCE

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. Since the stock has returned a staggering 220% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing Novabase S.G.P.S, we've discovered 1 warning sign that you should be aware of.

While Novabase S.G.P.S isn't earning the highest return, check out this free list of companies that are 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.