Will Ericsson Nikola Tesla d.d (ZGSE:ERNT) Multiply In Value Going Forward?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Ericsson Nikola Tesla d.d (ZGSE:ERNT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Ericsson Nikola Tesla d.d is:

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

0.18 = Kn90m ÷ (Kn1.1b - Kn636m) (Based on the trailing twelve months to September 2020).

Thus, Ericsson Nikola Tesla d.d has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Communications industry average of 10% it's much better.

See our latest analysis for Ericsson Nikola Tesla d.d

Above you can see how the current ROCE for Ericsson Nikola Tesla d.d compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Ericsson Nikola Tesla d.d.

What Does the ROCE Trend For Ericsson Nikola Tesla d.d Tell Us?

When we looked at the ROCE trend at Ericsson Nikola Tesla d.d, we didn't gain much confidence. To be more specific, ROCE has fallen from 29% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Ericsson Nikola Tesla d.d's current liabilities are still rather high at 57% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Ericsson Nikola Tesla d.d's ROCE

While returns have fallen for Ericsson Nikola Tesla d.d in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 105% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

On a final note, we've found 2 warning signs for Ericsson Nikola Tesla d.d that we think you should be aware of.

While Ericsson Nikola Tesla d.d may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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