Stock Analysis

Here's What's Concerning About Neosperience's (BIT:NSP) Returns On Capital

BIT:NSP
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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Neosperience (BIT:NSP), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Neosperience, this is the formula:

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

0.038 = €1.5m ÷ (€53m - €14m) (Based on the trailing twelve months to June 2022).

So, Neosperience has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Software industry average of 7.9%.

Our analysis indicates that NSP is potentially undervalued!

roce
BIT:NSP Return on Capital Employed December 8th 2022

In the above chart we have measured Neosperience's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Neosperience here for free.

What Does the ROCE Trend For Neosperience Tell Us?

In terms of Neosperience's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 5.3% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Neosperience is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 50% in the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Neosperience does have some risks, we noticed 4 warning signs (and 2 which are potentially serious) we think you should know about.

While Neosperience 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.

Valuation is complex, but we're helping make it simple.

Find out whether Neosperience is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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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.