Societatea de Constructii Napoca (BVB:NAPO) Is Experiencing Growth In Returns On Capital

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Societatea de Constructii Napoca (BVB:NAPO) looks quite promising in regards to its trends of return on capital.

Understanding 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. To calculate this metric for Societatea de Constructii Napoca, this is the formula:

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

0.012 = RON1.0m ÷ (RON145m - RON63m) (Based on the trailing twelve months to September 2024).

Thus, Societatea de Constructii Napoca has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Construction industry average of 3.7%.

Check out 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're interested in investigating Societatea de Constructii Napoca's past further, check out this free graph covering Societatea de Constructii Napoca's past earnings, revenue and cash flow.

What Can We Tell From Societatea de Constructii Napoca's ROCE Trend?

We're delighted to see that Societatea de Constructii Napoca is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 1.2% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

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 43% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

Our Take On Societatea de Constructii Napoca's ROCE

As discussed above, Societatea de Constructii Napoca appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And since the stock has fallen 45% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to know some of the risks facing Societatea de Constructii Napoca we've found 3 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.

While Societatea de Constructii Napoca may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.