Will New Constructor's Network (TYO:7057) Multiply In Value Going Forward?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of New Constructor's Network (TYO:7057) looks decent, right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What is it?

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 New Constructor's Network is:

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

0.10 = JP¥271m ÷ (JP¥5.3b - JP¥2.7b) (Based on the trailing twelve months to December 2020).

Therefore, New Constructor's Network has an ROCE of 10%. That's a pretty standard return and it's in line with the industry average of 9.9%.

See our latest analysis for New Constructor's Network

Historical performance is a great place to start when researching a stock so above you can see the gauge for New Constructor's Network's ROCE against it's prior returns. If you're interested in investigating New Constructor's Network's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is New Constructor's Network's ROCE Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past three years, ROCE has remained relatively flat at around 10% and the business has deployed 63% more capital into its operations. Since 10% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, New Constructor's Network's current liabilities are still rather high at 51% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

To sum it up, New Constructor's Network has simply been reinvesting capital steadily, at those decent rates of return. And the stock has followed suit returning a meaningful 76% to shareholders over the last year. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

One more thing, we've spotted 1 warning sign facing New Constructor's Network that you might find interesting.

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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