Here's What To Make Of NCL Industries' (NSE:NCLIND) Decelerating Rates Of Return

If you're looking for a multi-bagger, there's a few things to 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over NCL Industries' (NSE:NCLIND) trend of ROCE, we liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for NCL Industries:

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

0.14 = ₹1.6b ÷ (₹15b - ₹3.5b) (Based on the trailing twelve months to March 2022).

So, NCL Industries has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Basic Materials industry average of 9.5% it's much better.

View our latest analysis for NCL Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for NCL Industries' ROCE against it's prior returns. If you're interested in investigating NCL Industries' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

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 96% more capital into its operations. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line On NCL Industries' ROCE

In the end, NCL Industries has proven its ability to adequately reinvest capital at good rates of return. In light of this, the stock has only gained 2.4% over the last five years for shareholders who have owned the stock in this period. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

Like most companies, NCL Industries does come with some risks, and we've found 3 warning signs that you should be aware of.

While NCL Industries 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. 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.