Nemak S. A. B. de C. V (BMV:NEMAKA) Is Reinvesting At Lower Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Nemak S. A. B. de C. V (BMV:NEMAKA) and its ROCE trend, we weren't exactly thrilled.

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 Nemak S. A. B. de C. V, this is the formula:

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

0.05 = Mex$3.4b ÷ (Mex$100b - Mex$31b) (Based on the trailing twelve months to March 2021).

Thus, Nemak S. A. B. de C. V has an ROCE of 5.0%. Even though it's in line with the industry average of 5.0%, it's still a low return by itself.

See our latest analysis for Nemak S. A. B. de C. V

In the above chart we have measured Nemak S. A. B. de C. V's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

On the surface, the trend of ROCE at Nemak S. A. B. de C. V doesn't inspire confidence. To be more specific, ROCE has fallen from 14% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

What We Can Learn From Nemak S. A. B. de C. V's ROCE

To conclude, we've found that Nemak S. A. B. de C. V is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 60% 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 Nemak S. A. B. de C. V has the makings of a multi-bagger.

Nemak S. A. B. de C. V does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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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