NagaCorp (HKG:3918) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at NagaCorp (HKG:3918), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for NagaCorp:

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

0.0078 = US$18m ÷ (US$2.5b - US$188m) (Based on the trailing twelve months to June 2022).

Therefore, NagaCorp has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 2.2%.

View our latest analysis for NagaCorp

Above you can see how the current ROCE for NagaCorp compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering NagaCorp here for free.

So How Is NagaCorp's ROCE Trending?

When we looked at the ROCE trend at NagaCorp, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 0.8%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On NagaCorp's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for NagaCorp have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 81% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you're still interested in NagaCorp it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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.