What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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 investigating P.A. Nova (WSE:NVA), we don't think it's current trends fit the mold of a multi-bagger.
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. The formula for this calculation on P.A. Nova is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = zł46m ÷ (zł949m - zł211m) (Based on the trailing twelve months to December 2022).
Thus, P.A. Nova has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Construction industry average of 13%.
View our latest analysis for P.A. Nova
Historical performance is a great place to start when researching a stock so above you can see the gauge for P.A. Nova's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of P.A. Nova, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
Over the past five years, P.A. Nova's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect P.A. Nova to be a multi-bagger going forward.
The Bottom Line On P.A. Nova's ROCE
We can conclude that in regards to P.A. Nova's returns on capital employed and the trends, there isn't much change to report on. And investors appear hesitant that the trends will pick up because the stock has fallen 40% in the last five years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
P.A. Nova does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...
While P.A. Nova 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.
About WSE:NVA
Good value average dividend payer.
