Nuvoco Vistas (NSE:NUVOCO) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Nuvoco Vistas (NSE:NUVOCO), we don't think it's current trends fit the mold of a multi-bagger.

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

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. The formula for this calculation on Nuvoco Vistas is:

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

0.018 = ₹2.7b ÷ (₹196b - ₹51b) (Based on the trailing twelve months to September 2022).

Thus, Nuvoco Vistas has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 8.8%.

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

What Can We Tell From Nuvoco Vistas' ROCE Trend?

In terms of Nuvoco Vistas' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 5.6% over the last five years. 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.

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 24% 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.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.