What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of Norsk Hydro (OB:NHY) we really liked what we saw.
What Is 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. The formula for this calculation on Norsk Hydro is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.30 = kr50b ÷ (kr211b - kr42b) (Based on the trailing twelve months to March 2023).
So, Norsk Hydro has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.
Check out our latest analysis for Norsk Hydro
In the above chart we have measured Norsk Hydro'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 Norsk Hydro here for free.
SWOT Analysis for Norsk Hydro
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividends are covered by earnings and cash flows.
- Earnings growth over the past year is below its 5-year average.
- Dividend is low compared to the top 25% of dividend payers in the Metals and Mining market.
- Expensive based on P/E ratio and estimated fair value.
- NHY's financial characteristics indicate limited near-term opportunities for shareholders.
- Annual earnings are forecast to decline for the next 3 years.
So How Is Norsk Hydro's ROCE Trending?
We like the trends that we're seeing from Norsk Hydro. Over the last five years, returns on capital employed have risen substantially to 30%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 32%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line On Norsk Hydro's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Norsk Hydro has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 81% return over the last five years. In light of that, we think it's worth looking further into this stock because if Norsk Hydro can keep these trends up, it could have a bright future ahead.
Norsk Hydro does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
Valuation is complex, but we're here to simplify it.
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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.
About OB:NHY
Norsk Hydro
Engages in the power production, bauxite extraction, alumina refining, aluminium smelting, and recycling activities; and provision of extruded solutions worldwide.
Excellent balance sheet with reasonable growth potential.