NBI Bearings Europe SA (BME:NBI): What Are Investors Earning On Their Capital?

I am writing today to help inform people who are new to the stock market and want to begin learning the link between NBI Bearings Europe SA (BME:NBI)’s return fundamentals and stock market performance.

Buying NBI Bearings Europe makes you a partial owner of the company. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Therefore, looking at how efficiently NBI Bearings Europe 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.

View our latest analysis for NBI Bearings Europe

What is Return on Capital Employed (ROCE)?

Choosing to invest in NBI Bearings Europe comes at the cost of investing in another potentially favourable company. 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. To determine NBI Bearings Europe's capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). NBI’s ROCE is calculated below:

As you can see, NBI earned €7.6 from every €100 you invested over the previous twelve months. This shows NBI Bearings Europe provides a dull capital return that is below the 15% ROCE that is typically considered to be a strong benchmark. Nevertheless, if NBI is clever with their reinvestments or dividend payments, investors can still grow their capital but may fall behind other more attractive opportunities in the market.

Why is this the case?

NBI Bearings Europe's relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment NBI Bearings Europe is in an adverse position, but this can change if these factors improve. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Three years ago, NBI’s ROCE was 3.4%, which means the company's capital returns have improved. We can see that earnings have increased from €570k to €3m whilst capital employed also increased but to a smaller extent, which means the company has been able to improve ROCE by driving up earnings relative to the capital invested in the business.

Next Steps

Although NBI Bearings Europe’s ROCE is currently below the acceptable benchmark, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. But don't forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation to determine if an opportunity exists that isn't made apparent by looking at past data. NBI Bearings Europe's fundamentals can be explored with the links I've provided below if you are interested, otherwise you can start looking at other high-performing stocks.

1. Future Outlook: What are well-informed industry analysts predicting for NBI’s future growth? Take a look at our free research report of analyst consensus for NBI’s outlook.
2. Valuation: What is NBI worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether NBI is currently undervalued by the market.
3. 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 editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.