What Can The Trends At Neo Industrial (HEL:NEO1V) Tell Us About Their Returns?

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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Neo Industrial (HEL:NEO1V) looks quite promising in regards to its trends of return on capital.

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

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. Analysts use this formula to calculate it for Neo Industrial:

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

0.029 = €1.3m ÷ (€77m - €30m) (Based on the trailing twelve months to June 2020).

Therefore, Neo Industrial has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 10%.

Check out our latest analysis for Neo Industrial

Above you can see how the current ROCE for Neo Industrial compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Neo Industrial.

What Does the ROCE Trend For Neo Industrial Tell Us?

The fact that Neo Industrial is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 2.9% which is a sight for sore eyes. In addition to that, Neo Industrial is employing 172% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, Neo Industrial has decreased current liabilities to 39% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Neo Industrial has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Neo Industrial's ROCE

In summary, it's great to see that Neo Industrial has managed to break into profitability and is continuing to reinvest in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 60% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we found 2 warning signs for Neo Industrial (1 is concerning) you should be aware of.

While Neo Industrial 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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