These Trends Paint A Bright Future For Nelco (NSE:NELCO)

What are the early trends we should look for to identify a stock that could 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. With that in mind, the ROCE of Nelco (NSE:NELCO) looks great, so lets see what the trend can tell us.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Nelco is:

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

0.27 = ₹291m ÷ (₹2.8b - ₹1.7b) (Based on the trailing twelve months to June 2020).

So, Nelco has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Communications industry average of 9.2%.

Check out our latest analysis for Nelco

Historical performance is a great place to start when researching a stock so above you can see the gauge for Nelco's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Nelco, check out these free graphs here.

How Are Returns Trending?

Nelco has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 27% on its capital. And unsurprisingly, like most companies trying to break into the black, Nelco is utilizing 483% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 62%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Bottom Line

In summary, it's great to see that Nelco has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 243% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One final note, you should learn about the 4 warning signs we've spotted with Nelco (including 1 which is shouldn't be ignored) .

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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This article by Simply Wall St is general in nature. 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.
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