There are a few key trends to look for if we want to identify the next multi-bagger. 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. Although, when we looked at Neosperience (BIT:NSP), it didn't seem to tick all of these boxes.
Understanding 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. To calculate this metric for Neosperience, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = €1.1m ÷ (€29m - €8.4m) (Based on the trailing twelve months to June 2020).
Thus, Neosperience has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Software industry average of 11%.
See our latest analysis for Neosperience
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, you can check out the forecasts from the analysts covering Neosperience here for free.
How Are Returns Trending?
There are better returns on capital out there than what we're seeing at Neosperience. 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. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Key Takeaway
Long story short, while Neosperience has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 19% over the last year, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
Neosperience does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...
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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About BIT:NSP
Very undervalued with reasonable growth potential.