Here's What's Concerning About NNIT's (CPH:NNIT) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Having said that, from a first glance at NNIT (CPH:NNIT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for NNIT, this is the formula:

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

0.087 = kr.166m ÷ (kr.2.7b - kr.788m) (Based on the trailing twelve months to March 2021).

Thus, NNIT has an ROCE of 8.7%. In absolute terms, that's a low return but it's around the Healthcare Services industry average of 9.6%.

See our latest analysis for NNIT

In the above chart we have measured NNIT's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

When we looked at the ROCE trend at NNIT, we didn't gain much confidence. To be more specific, ROCE has fallen from 35% over the last five years. However it looks like NNIT might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, NNIT has done well to pay down its current liabilities to 29% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On NNIT's ROCE

To conclude, we've found that NNIT is reinvesting in the business, but returns have been falling. Since the stock has declined 34% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we've found 4 warning signs for NNIT that we think you should be aware of.

While NNIT 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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