Northamber's (LON:NAR) Returns On Capital Are Heading Higher

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Northamber (LON:NAR) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

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 Northamber:

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

0.0015 = UK£38k ÷ (UK£34m - UK£8.9m) (Based on the trailing twelve months to December 2021).

Thus, Northamber has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Electronic industry average of 12%.

View our latest analysis for Northamber

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

What The Trend Of ROCE Can Tell Us

We're delighted to see that Northamber is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.2% on its capital. And unsurprisingly, like most companies trying to break into the black, Northamber is utilizing 34% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

What We Can Learn From Northamber's ROCE

Overall, Northamber gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 69% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Northamber, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.