This article is intended for those of you who are at the beginning of your investing journey and want a simplistic look at the return on GN Store Nord A/S (CPH:GN) stock.
If you purchase a GN share you are effectively becoming a partner with many other shareholders. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Therefore, looking at how efficiently GN Store Nord is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
What is Return on Capital Employed (ROCE)?
When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if GN Store Nord is good at growing investor capital. I have calculated GN Store Nord’s ROCE for you below:
ROCE Calculation for GN
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = ø1.6b ÷ (ø12.1b – ø2.7b) = 17%
GN’s 17% ROCE means that for every DKK100 you invest, the company creates DKK16.8. This makes GN Store Nord satisfactorily profitable when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future and is able to either provide solid dividends or reinvestment opportunities, your capital will enlarge at a favourable rate over time.
Does this mean I should invest?
GN Store Nord’s relatively strong ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment GN Store Nord is in a favourable position, but this can change if these factors underperform. Therefore, investors need to be confident in the trend of the inputs in the formula above, so that GN Store Nord will continue the solid returns. If you go back three years, you’ll find that GN’s ROCE has increased from 12%. Similarly, the movement in the earnings variable shows a jump from ø1.1b to ø1.6b whilst capital employed improved as well albeit by a relatively smaller amount, signifying ROCE increased as a result of a greater surge in earnings compared to the business’ use of capital.
GN Store Nord’s ROCE has increased in the recent past and is above a benchmark that makes the company a potentially attractive stock that can achieve a solid return on investment. As an investor this is the type of situation you look for, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. Without considering these fundamentals, you cannot be sure if this trend will continue or if you are getting a good deal for the future returns you are paying for. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for GN’s future growth? Take a look at our free research report of analyst consensus for GN’s outlook.
- Valuation: What is GN worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether GN is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.