The Returns At Nomad Technologies Holdings (HKG:8645) Provide Us With Signs Of What's To Come

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Nomad Technologies Holdings (HKG:8645) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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)

0.032 = RM1.9m ÷ (RM71m - RM11m) (Based on the trailing twelve months to September 2020).

Thus, Nomad Technologies Holdings has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the IT industry average of 8.6%.

Check out 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 want to delve into the historical earnings, revenue and cash flow of Nomad Technologies Holdings, check out these free graphs here.

The Trend Of ROCE

In terms of Nomad Technologies Holdings' historical ROCE movements, the trend isn't fantastic. Over the last three years, returns on capital have decreased to 3.2% from 55% three years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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, Nomad Technologies Holdings has done well to pay down its current liabilities to 16% of total assets. That could partly explain why the ROCE has dropped. 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 Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Nomad Technologies Holdings have fallen, meanwhile the business is employing more capital than it was three years ago. Investors haven't taken kindly to these developments, since the stock has declined 65% from where it was year ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

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

While Nomad Technologies 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.

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This article by Simply Wall St is general in nature. 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.
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