When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into NAHL Group (LON:NAH), the trends above didn't look too great.
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 NAHL Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = UK£4.8m ÷ (UK£96m - UK£21m) (Based on the trailing twelve months to December 2022).
Therefore, NAHL Group has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Media industry average of 11%.
See our latest analysis for NAHL Group
In the above chart we have measured NAHL Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is NAHL Group's ROCE Trending?
In terms of NAHL Group's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 20%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on NAHL Group becoming one if things continue as they have.
The Bottom Line
In summary, it's unfortunate that NAHL Group is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 64% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you'd like to know about the risks facing NAHL Group, we've discovered 1 warning sign that you should be aware of.
While NAHL Group 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. 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.
About AIM:NAH
NAHL Group
Provides products and services to individuals and businesses in the consumer legal services and catastrophic injury markets in the United Kingdom.
Flawless balance sheet with solid track record.