Returns On Capital At Northbridge Industrial Services (LON:NBI) Paint An Interesting Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Northbridge Industrial Services (LON:NBI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Northbridge Industrial Services is:

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

0.051 = UK£1.9m ÷ (UK£51m - UK£14m) (Based on the trailing twelve months to June 2020).

So, Northbridge Industrial Services has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 12%.

View our latest analysis for Northbridge Industrial Services

Above you can see how the current ROCE for Northbridge Industrial Services compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Northbridge Industrial Services Tell Us?

Over the past five years, Northbridge Industrial Services' ROCE has remained relatively flat while the business is using 37% less capital than before. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. In addition to that, since the ROCE doesn't scream "quality" at 5.1%, it's hard to get excited about these developments.

Our Take On Northbridge Industrial Services' ROCE

In summary, Northbridge Industrial Services isn't reinvesting funds back into the business and returns aren't growing. Unsurprisingly then, the total return to shareholders over the last five years has been flat. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing to note, we've identified 1 warning sign with Northbridge Industrial Services and understanding it should be part of your investment process.

While Northbridge Industrial Services 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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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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