Returns On Capital Signal Tricky Times Ahead For Nynomic (ETR:M7U)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Nynomic (ETR:M7U), it didn't seem to tick all of these boxes.

Understanding 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. Analysts use this formula to calculate it for Nynomic:

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

0.087 = €6.2m ÷ (€89m - €18m) (Based on the trailing twelve months to June 2020).

So, Nynomic has an ROCE of 8.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.0%.

View our latest analysis for Nynomic

Above you can see how the current ROCE for Nynomic 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 Nynomic here for free.

What Does the ROCE Trend For Nynomic Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 24% five years ago, while capital employed has grown 253%. That being said, Nynomic raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Nynomic probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

What We Can Learn From Nynomic's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Nynomic is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 446% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to know some of the risks facing Nynomic we've found 4 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Nynomic may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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