If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at NOVAREXLtd (KOSDAQ:194700) and its ROCE trend, we weren't exactly thrilled.
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. To calculate this metric for NOVAREXLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = ₩24b ÷ (₩198b - ₩56b) (Based on the trailing twelve months to September 2020).
Thus, NOVAREXLtd has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Personal Products industry average of 6.8% it's much better.
Above you can see how the current ROCE for NOVAREXLtd 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 NOVAREXLtd.
What Does the ROCE Trend For NOVAREXLtd Tell Us?
On the surface, the trend of ROCE at NOVAREXLtd doesn't inspire confidence. Over the last four years, returns on capital have decreased to 17% from 25% four years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On NOVAREXLtd's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that NOVAREXLtd is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 65% over the last year, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
NOVAREXLtd does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.
While NOVAREXLtd 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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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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