What Do The Returns On Capital At NDFOS (KOSDAQ:238090) Tell Us?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at NDFOS (KOSDAQ:238090), it didn't seem to tick all of these boxes.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for NDFOS:

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

0.061 = ₩9.3b ÷ (₩179b - ₩27b) (Based on the trailing twelve months to September 2020).

So, NDFOS has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 8.1%.

Check out our latest analysis for NDFOS

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

So How Is NDFOS' ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 57% five years ago, while the business's capital employed increased by 533%. That being said, NDFOS raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence NDFOS might not have received a full period of earnings contribution from it.

On a related note, NDFOS has decreased its current liabilities to 15% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From NDFOS' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that NDFOS is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 79% to shareholders over the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing to note, we've identified 4 warning signs with NDFOS and understanding them should be part of your investment process.

While NDFOS may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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