Capital Allocation Trends At Nuvoco Vistas (NSE:NUVOCO) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Nuvoco Vistas (NSE:NUVOCO) 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 Nuvoco Vistas is:

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

0.027 = ₹4.1b ÷ (₹196b - ₹45b) (Based on the trailing twelve months to June 2022).

Thus, Nuvoco Vistas has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 10%.

Our analysis indicates that NUVOCO is potentially undervalued!

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 to see what analysts are forecasting going forward, you should check out our free report for Nuvoco Vistas.

What The Trend Of ROCE Can Tell Us

In terms of Nuvoco Vistas' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 4.9%, but since then they've fallen to 2.7%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Nuvoco Vistas' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Nuvoco Vistas. And there could be an opportunity here if other metrics look good too, because the stock has declined 25% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 1 warning sign for Nuvoco Vistas that we think you should be aware of.

While Nuvoco Vistas 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.