Here's What To Make Of Nava's (NSE:NAVA) Decelerating Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Nava (NSE:NAVA) looks decent, right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Nava, this is the formula:

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

0.14 = ₹14b ÷ (₹101b - ₹5.2b) (Based on the trailing twelve months to September 2023).

Therefore, Nava has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Industrials industry average of 12% it's much better.

Check out our latest analysis for Nava

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

What Can We Tell From Nava's ROCE Trend?

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 23% more capital into its operations. 14% is a pretty standard return, and it provides some comfort knowing that Nava has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Our Take On Nava's ROCE

The main thing to remember is that Nava has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 366% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Nava does have some risks though, and we've spotted 1 warning sign for Nava that you might be interested in.

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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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.