Investors Met With Slowing Returns on Capital At Newlat Food (BIT:NWL)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Having said that, from a first glance at Newlat Food (BIT:NWL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Newlat Food is:

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

0.055 = €27m ÷ (€775m - €284m) (Based on the trailing twelve months to March 2021).

Thus, Newlat Food has an ROCE of 5.5%. Even though it's in line with the industry average of 5.5%, it's still a low return by itself.

Check out our latest analysis for Newlat Food

Above you can see how the current ROCE for Newlat Food compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Newlat Food here for free.

What Does the ROCE Trend For Newlat Food Tell Us?

There are better returns on capital out there than what we're seeing at Newlat Food. The company has employed 127% more capital in the last four years, and the returns on that capital have remained stable at 5.5%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On Newlat Food's ROCE

Long story short, while Newlat Food has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 33% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to know some of the risks facing Newlat Food we've found 4 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.

While Newlat Food isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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