Returns On Capital At Neurones (EPA:NRO) Paint A Concerning Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. In light of that, when we looked at Neurones (EPA:NRO) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Neurones:

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

0.13 = €52m ÷ (€550m - €161m) (Based on the trailing twelve months to December 2020).

Thus, Neurones has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 9.8% it's much better.

Check out our latest analysis for Neurones

Above you can see how the current ROCE for Neurones 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 Neurones.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Neurones, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 17% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Neurones' ROCE

Bringing it all together, while we're somewhat encouraged by Neurones' reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 51% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you're still interested in Neurones it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Neurones 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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