We're Watching These Trends At Navkar (NSE:NAVKARCORP)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Navkar (NSE:NAVKARCORP) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Navkar, this is the formula:

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

0.043 = ₹940m ÷ (₹24b - ₹2.2b) (Based on the trailing twelve months to September 2020).

So, Navkar has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 6.3%.

Check out our latest analysis for Navkar

Historical performance is a great place to start when researching a stock so above you can see the gauge for Navkar's ROCE against it's prior returns. If you'd like to look at how Navkar has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Navkar's ROCE Trend?

When we looked at the ROCE trend at Navkar, we didn't gain much confidence. To be more specific, ROCE has fallen from 7.2% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Navkar's reinvestment in its own business, we're aware that returns are shrinking. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 86% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Navkar does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...

While Navkar 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.

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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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