Capital Allocation Trends At North Eastern Carrying (NSE:NECCLTD) Aren't Ideal

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating North Eastern Carrying (NSE:NECCLTD), we don't think it's current trends fit the mold of a multi-bagger.

We've discovered 2 warning signs about North Eastern Carrying. View them for free.

What Is 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 North Eastern Carrying:

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

0.089 = ₹216m ÷ (₹3.3b - ₹880m) (Based on the trailing twelve months to December 2024).

Therefore, North Eastern Carrying has an ROCE of 8.9%. Ultimately, that's a low return and it under-performs the Transportation industry average of 15%.

Check out our latest analysis for North Eastern Carrying

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

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 15% five years ago, while capital employed has grown 137%. That being said, North Eastern Carrying raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. North Eastern Carrying probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, North Eastern Carrying has done well to pay down its current liabilities to 27% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On North Eastern Carrying's ROCE

In summary, North Eastern Carrying is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 486% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

North Eastern Carrying does have some risks though, and we've spotted 2 warning signs for North Eastern Carrying that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.