Capital Allocation Trends At Novorossiysk Commercial Sea Port (MCX:NMTP) Aren't Ideal

When researching a stock for investment, what can tell us that the company is in decline? 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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Novorossiysk Commercial Sea Port (MCX:NMTP), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Novorossiysk Commercial Sea Port:

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

0.17 = US$324m ÷ (US$2.3b - US$312m) (Based on the trailing twelve months to June 2021).

Therefore, Novorossiysk Commercial Sea Port has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 7.5% generated by the Infrastructure industry.

View our latest analysis for Novorossiysk Commercial Sea Port

Above you can see how the current ROCE for Novorossiysk Commercial Sea Port compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Novorossiysk Commercial Sea Port.

What Can We Tell From Novorossiysk Commercial Sea Port's ROCE Trend?

We are a bit worried about the trend of returns on capital at Novorossiysk Commercial Sea Port. About five years ago, returns on capital were 32%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Novorossiysk Commercial Sea Port becoming one if things continue as they have.

The Bottom Line On Novorossiysk Commercial Sea Port's ROCE

In summary, it's unfortunate that Novorossiysk Commercial Sea Port is generating lower returns from the same amount of capital. However the stock has delivered a 73% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to know some of the risks facing Novorossiysk Commercial Sea Port we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Novorossiysk Commercial Sea Port 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.