Some Investors May Be Worried About Nederman Holding's (STO:NMAN) 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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Nederman Holding (STO:NMAN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Nederman Holding:

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

0.10 = kr322m ÷ (kr4.2b - kr1.1b) (Based on the trailing twelve months to December 2020).

Therefore, Nederman Holding has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Building industry average of 12%.

View our latest analysis for Nederman Holding

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

The Trend Of ROCE

When we looked at the ROCE trend at Nederman Holding, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 10% from 15% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Nederman Holding have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 107% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 3 warning signs for Nederman Holding you'll probably want to know about.

While Nederman Holding 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. 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.
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