We Think Nelco (NSE:NELCO) Might Have The DNA Of A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Nelco's (NSE:NELCO) returns on capital, so let's have a look.

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 Nelco:

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

0.23 = ₹262m ÷ (₹2.6b - ₹1.5b) (Based on the trailing twelve months to December 2020).

Thus, Nelco has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 6.7% earned by companies in a similar industry.

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're interested in investigating Nelco's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Nelco's ROCE Trend?

We like the trends that we're seeing from Nelco. The data shows that returns on capital have increased substantially over the last five years to 23%. The amount of capital employed has increased too, by 578%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 56%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

What We Can Learn From Nelco's ROCE

In summary, it's great to see that Nelco can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 110% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to know some of the risks facing Nelco we've found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.

Nelco is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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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