Returns On Capital Are Showing Encouraging Signs At NVC International Holdings (HKG:2222)

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in NVC International Holdings' (HKG:2222) returns on capital, so let's have a 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. To calculate this metric for NVC International Holdings, this is the formula:

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

0.0029 = US$1.5m ÷ (US$580m - US$71m) (Based on the trailing twelve months to June 2024).

Therefore, NVC International Holdings has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Household Products industry average of 10%.

View our latest analysis for NVC International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for NVC International Holdings' ROCE against it's prior returns. If you'd like to look at how NVC International Holdings has performed in the past in other metrics, you can view this free graph of NVC International Holdings' past earnings, revenue and cash flow.

What Can We Tell From NVC International Holdings' ROCE Trend?

We're delighted to see that NVC International Holdings is reaping rewards from its investments and has now broken into profitability. The company now earns 0.3% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 12%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On NVC International Holdings' ROCE

To sum it up, NVC International Holdings is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 50% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

NVC International Holdings does have some risks though, and we've spotted 2 warning signs for NVC International Holdings that you might be interested in.

While NVC International Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.