Slowing Rates Of Return At Neurones (EPA:NRO) Leave Little Room For Excitement

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. That's why when we briefly looked at Neurones' (EPA:NRO) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

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

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

0.18 = €67m ÷ (€571m - €190m) (Based on the trailing twelve months to June 2022).

Therefore, Neurones has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 12% generated by the IT industry.

Our analysis indicates that NRO is potentially undervalued!

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, you can check out the forecasts from the analysts covering Neurones here for free.

What Does the ROCE Trend For Neurones Tell Us?

While the returns on capital are good, they haven't moved much. The company has employed 50% more capital in the last five years, and the returns on that capital have remained stable at 18%. 18% is a pretty standard return, and it provides some comfort knowing that Neurones has consistently earned this amount. 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.

The Key Takeaway

The main thing to remember is that Neurones has proven its ability to continually reinvest at respectable rates of return. In light of this, the stock has only gained 36% over the last five years for shareholders who have owned the stock in this period. So to determine if Neurones is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

While Neurones doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.