Returns At Netcompany Group (CPH:NETC) Appear To Be Weighed Down

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Netcompany Group's (CPH:NETC) ROCE trend, we were pretty happy with what we saw.

Understanding 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. To calculate this metric for Netcompany Group, this is the formula:

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

0.13 = kr.790m ÷ (kr.7.6b - kr.1.6b) (Based on the trailing twelve months to June 2023).

So, Netcompany Group has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 15% generated by the IT industry.

View our latest analysis for Netcompany Group

In the above chart we have measured Netcompany Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Netcompany Group here for free.

How Are Returns Trending?

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 100% more capital into its operations. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Our Take On Netcompany Group's ROCE

In the end, Netcompany Group has proven its ability to adequately reinvest capital at good rates of return. In light of this, the stock has only gained 7.1% over the last five years for shareholders who have owned the stock in this period. So to determine if Netcompany Group is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

If you want to continue researching Netcompany Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Netcompany Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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

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.