The Returns On Capital At NOVAREXLtd (KOSDAQ:194700) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think NOVAREXLtd (KOSDAQ:194700) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. The formula for this calculation on NOVAREXLtd is:

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

0.10 = ₩22b ÷ (₩287b - ₩73b) (Based on the trailing twelve months to September 2024).

Therefore, NOVAREXLtd has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 7.8% generated by the Personal Products industry.

View our latest analysis for NOVAREXLtd

In the above chart we have measured NOVAREXLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for NOVAREXLtd .

The Trend Of ROCE

When we looked at the ROCE trend at NOVAREXLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 13% over the last five years. However it looks like NOVAREXLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

In summary, NOVAREXLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 20% in the last five years. Therefore based on the analysis done in this article, we don't think NOVAREXLtd has the makings of a multi-bagger.

One more thing, we've spotted 1 warning sign facing NOVAREXLtd 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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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.