Will NagaCorp (HKG:3918) Multiply In Value Going Forward?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think NagaCorp (HKG:3918) 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)

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 NagaCorp is:

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

0.20 = US$328m ÷ (US$2.3b - US$619m) (Based on the trailing twelve months to June 2020).

Therefore, NagaCorp has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 3.7% generated by the Hospitality industry.

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From NagaCorp's ROCE Trend?

When we looked at the ROCE trend at NagaCorp, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 20% from 26% five years ago. 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.

On a side note, NagaCorp's current liabilities have increased over the last five years to 27% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

Our Take On NagaCorp's ROCE

We're a bit apprehensive about NagaCorp because despite more capital being deployed in the business, returns on that capital and sales have both fallen. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 153%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing, we've spotted 1 warning sign facing NagaCorp that you might find interesting.

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