Has Nova Wellness Group Berhad (KLSE:NOVA) Got What It Takes To Become A Multi-Bagger?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Nova Wellness Group Berhad (KLSE:NOVA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Nova Wellness Group Berhad:

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

0.18 = RM17m ÷ (RM101m - RM4.6m) (Based on the trailing twelve months to September 2020).

So, Nova Wellness Group Berhad has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 13% generated by the Personal Products industry.

View our latest analysis for Nova Wellness Group Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Nova Wellness Group Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Nova Wellness Group Berhad, check out these free graphs here.

The Trend Of ROCE

In terms of Nova Wellness Group Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 56% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

While returns have fallen for Nova Wellness Group Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 73% to shareholders over the last year. 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 2 warning signs with Nova Wellness Group Berhad and understanding these should be part of your investment process.

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. 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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