We Like These Underlying Return On Capital Trends At Novatech Industries (EPA:MLNOV)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Speaking of which, we noticed some great changes in Novatech Industries' (EPA:MLNOV) returns on capital, so let's have a look.

What Is 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 Novatech Industries:

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

0.083 = €3.3m ÷ (€56m - €17m) (Based on the trailing twelve months to December 2023).

Thus, Novatech Industries has an ROCE of 8.3%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 6.6%.

Check out our latest analysis for Novatech Industries

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Novatech Industries' past further, check out this free graph covering Novatech Industries' past earnings, revenue and cash flow.

So How Is Novatech Industries' ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last three years, the returns generated on capital employed have grown considerably to 8.3%. The amount of capital employed has increased too, by 83%. So we're very much inspired by what we're seeing at Novatech Industries thanks to its ability to profitably reinvest capital.

The Key Takeaway

In summary, it's great to see that Novatech Industries can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 41% 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.

One more thing to note, we've identified 2 warning signs with Novatech Industries and understanding these should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.