Here's What To Make Of NPC's (KRX:004250) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Having said that, from a first glance at NPC (KRX:004250) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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 NPC, this is the formula:

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

0.051 = ₩16b ÷ (₩412b - ₩100b) (Based on the trailing twelve months to September 2020).

So, NPC has an ROCE of 5.1%. On its own, that's a low figure but it's around the 5.7% average generated by the Packaging industry.

View our latest analysis for NPC

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how NPC has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From NPC's ROCE Trend?

When we looked at the ROCE trend at NPC, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.8% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On NPC's ROCE

To conclude, we've found that NPC is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 41% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think NPC has the makings of a multi-bagger.

One more thing: We've identified 2 warning signs with NPC (at least 1 which can't be ignored) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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