The Trends At Nedap (AMS:NEDAP) That You Should Know About

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. So, when we ran our eye over Nedap's (AMS:NEDAP) trend of ROCE, we liked what we saw.

Understanding 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. Analysts use this formula to calculate it for Nedap:

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

0.17 = €17m ÷ (€125m - €28m) (Based on the trailing twelve months to June 2020).

Therefore, Nedap has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 9.8% it's much better.

View our latest analysis for Nedap

In the above chart we have measured Nedap's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Nedap here for free.

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. The company has employed 36% more capital in the last five years, and the returns on that capital have remained stable at 17%. Since 17% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Nedap has done well to reduce current liabilities to 22% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Nedap's ROCE

In the end, Nedap has proven its ability to adequately reinvest capital at good rates of return. And the stock has followed suit returning a meaningful 87% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you want to continue researching Nedap, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Nedap 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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