Returns At Societatea de Constructii Napoca (BVB:NAPO) Are On The Way Up

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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 on that note, Societatea de Constructii Napoca (BVB:NAPO) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Societatea de Constructii Napoca is:

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

0.081 = RON13m ÷ (RON162m - RON1.0m) (Based on the trailing twelve months to December 2022).

Therefore, Societatea de Constructii Napoca has an ROCE of 8.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10%.

See our latest analysis for Societatea de Constructii Napoca

Historical performance is a great place to start when researching a stock so above you can see the gauge for Societatea de Constructii Napoca's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Societatea de Constructii Napoca, check out these free graphs here.

The Trend Of ROCE

We're delighted to see that Societatea de Constructii Napoca is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 8.1% on its capital. Not only that, but the company is utilizing 191% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 0.6%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From Societatea de Constructii Napoca's ROCE

Overall, Societatea de Constructii Napoca gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 207% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing Societatea de Constructii Napoca, we've discovered 1 warning sign that you should be aware of.

While Societatea de Constructii Napoca 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.