Returns On Capital Are Showing Encouraging Signs At Norwegian Air Shuttle (OB:NAS)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at Norwegian Air Shuttle (OB:NAS) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Norwegian Air Shuttle is:

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

0.10 = kr2.3b ÷ (kr38b - kr14b) (Based on the trailing twelve months to September 2024).

Thus, Norwegian Air Shuttle has an ROCE of 10%. By itself that's a normal return on capital and it's in line with the industry's average returns of 10.0%.

Check out our latest analysis for Norwegian Air Shuttle

Above you can see how the current ROCE for Norwegian Air Shuttle compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Norwegian Air Shuttle .

How Are Returns Trending?

It's great to see that Norwegian Air Shuttle has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 65% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Norwegian Air Shuttle could be selling under-performing assets since the ROCE is improving.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 38% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

Our Take On Norwegian Air Shuttle's ROCE

From what we've seen above, Norwegian Air Shuttle has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has dived 99% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

If you'd like to know about the risks facing Norwegian Air Shuttle, we've discovered 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.