Stock Analysis

Slowing Rates Of Return At Neosperience (BIT:NSP) Leave Little Room For Excitement

BIT:NSP
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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Neosperience (BIT:NSP), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Neosperience is:

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

0.056 = €1.1m ÷ (€29m - €8.4m) (Based on the trailing twelve months to June 2020).

Therefore, Neosperience has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Software industry average of 12%.

View our latest analysis for Neosperience

roce
BIT:NSP Return on Capital Employed March 23rd 2021

Above you can see how the current ROCE for Neosperience compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Neosperience.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Neosperience in recent years. Over the past three years, ROCE has remained relatively flat at around 5.6% and the business has deployed 209% more capital into its operations. 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.

In Conclusion...

In conclusion, Neosperience has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 23% over the last year. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One final note, you should learn about the 3 warning signs we've spotted with Neosperience (including 1 which is concerning) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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