Be Wary Of Nomad Technologies Holdings (HKG:8645) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to 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. Although, when we looked at Nomad Technologies Holdings (HKG:8645), it didn't seem to tick all of these boxes.

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 Nomad Technologies Holdings, this is the formula:

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

0.027 = RM1.6m ÷ (RM69m - RM9.8m) (Based on the trailing twelve months to March 2021).

Therefore, Nomad Technologies Holdings has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the IT industry average of 7.6%.

See our latest analysis for Nomad Technologies Holdings

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

The Trend Of ROCE

In terms of Nomad Technologies Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 60% over the last three years. However it looks like Nomad Technologies Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Nomad Technologies Holdings has decreased its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

In summary, Nomad Technologies Holdings is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 61% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 2 warning signs with Nomad Technologies Holdings (at least 1 which can't be ignored) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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