There are a few key trends to look for if we want to identify the next 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Nuvoco Vistas (NSE:NUVOCO) and its ROCE trend, we weren't exactly thrilled.
What Is Return On Capital Employed (ROCE)?
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. The formula for this calculation on Nuvoco Vistas is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = ₹2.7b ÷ (₹190b - ₹53b) (Based on the trailing twelve months to March 2023).
So, Nuvoco Vistas has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 7.4%.
Check out our latest analysis for Nuvoco Vistas
Above you can see how the current ROCE for Nuvoco Vistas compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Nuvoco Vistas here for free.
SWOT Analysis for Nuvoco Vistas
- Debt is well covered by cash flow.
- Earnings declined over the past year.
- Interest payments on debt are not well covered.
- Annual earnings are forecast to grow faster than the Indian market.
- Good value based on P/S ratio compared to estimated Fair P/S ratio.
- Annual revenue is forecast to grow slower than the Indian market.
How Are Returns Trending?
On the surface, the trend of ROCE at Nuvoco Vistas doesn't inspire confidence. Around five years ago the returns on capital were 6.9%, but since then they've fallen to 2.0%. 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.
What We Can Learn From Nuvoco Vistas' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Nuvoco Vistas is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 7.1% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.
If you'd like to know more about Nuvoco Vistas, we've spotted 3 warning signs, and 1 of them is concerning.
While Nuvoco Vistas 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.
Valuation is complex, but we're here to simplify it.
Discover if Nuvoco Vistas might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
About NSEI:NUVOCO
Fair value with moderate growth potential.
