Returns On Capital At NCC (NSE:NCC) Have Stalled

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at NCC (NSE:NCC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. Analysts use this formula to calculate it for NCC:

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

0.13 = ₹7.4b ÷ (₹135b - ₹78b) (Based on the trailing twelve months to March 2021).

So, NCC has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 9.2% it's much better.

View our latest analysis for NCC

In the above chart we have measured NCC's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for NCC.

So How Is NCC's ROCE Trending?

There hasn't been much to report for NCC's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if NCC doesn't end up being a multi-bagger in a few years time.

On a separate but related note, it's important to know that NCC has a current liabilities to total assets ratio of 58%, which we'd consider pretty high. 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 NCC's ROCE

In a nutshell, NCC has been trudging along with the same returns from the same amount of capital over the last five years. And with the stock having returned a mere 25% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

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

While NCC 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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