Navigator Company (ELI:NVG) Could Be Struggling To Allocate Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Navigator Company (ELI:NVG), so let's see why.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Navigator Company, this is the formula:

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

0.056 = €109m ÷ (€2.6b - €687m) (Based on the trailing twelve months to March 2021).

Therefore, Navigator Company has an ROCE of 5.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.6%.

See our latest analysis for Navigator Company

Above you can see how the current ROCE for Navigator Company 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 report on analyst forecasts for the company.

What Does the ROCE Trend For Navigator Company Tell Us?

There is reason to be cautious about Navigator Company, given the returns are trending downwards. To be more specific, the ROCE was 14% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Navigator Company becoming one if things continue as they have.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 39% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know more about Navigator Company, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

While Navigator Company 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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