Returns On Capital At Northbridge Industrial Services (LON:NBI) Have Stalled

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Northbridge Industrial Services (LON:NBI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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).

Therefore, 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

Historical performance is a great place to start when researching a stock so above you can see the gauge for Northbridge Industrial Services' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Northbridge Industrial Services, check out these free graphs here.

So How Is Northbridge Industrial Services' ROCE Trending?

Over the past five years, Northbridge Industrial Services' ROCE has remained relatively flat while the business is using 37% less capital than before. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. In addition to that, since the ROCE doesn't scream "quality" at 5.1%, it's hard to get excited about these developments.

The Key Takeaway

Overall, we're not ecstatic to see Northbridge Industrial Services reducing the amount of capital it employs in the business. Since the stock has gained an impressive 48% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Northbridge Industrial Services does have some risks though, and we've spotted 1 warning sign for Northbridge Industrial Services that you might be interested in.

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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