Returns Are Gaining Momentum At NRC Group (OB:NRC)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at NRC Group (OB:NRC) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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 NRC Group:

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

0.021 = kr68m ÷ (kr5.0b - kr1.8b) (Based on the trailing twelve months to March 2024).

Therefore, NRC Group has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Construction industry average of 11%.

View our latest analysis for NRC Group

In the above chart we have measured NRC Group'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 NRC Group for free.

What Can We Tell From NRC Group's ROCE Trend?

Shareholders will be relieved that NRC Group has broken into profitability. The company now earns 2.1% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by NRC Group has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Key Takeaway

To sum it up, NRC Group is collecting higher returns from the same amount of capital, and that's impressive. However the stock is down a substantial 85% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

On a final note, we've found 1 warning sign for NRC Group that we think you should be aware of.

While NRC Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.