We're Watching These Trends At Nederman Holding (STO:NMAN)

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Nederman Holding (STO:NMAN) and its ROCE trend, we weren't exactly thrilled.

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 Nederman Holding, this is the formula:

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

0.094 = kr310m ÷ (kr4.5b - kr1.2b) (Based on the trailing twelve months to September 2020).

Thus, Nederman Holding has an ROCE of 9.4%. In absolute terms, that's a low return but it's around the Building industry average of 12%.

Check out 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're interested in investigating Nederman Holding's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Nederman Holding's ROCE Trend?

In terms of Nederman Holding's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 15% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Nederman Holding's ROCE

We're a bit apprehensive about Nederman Holding because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these concerning fundamentals, the stock has performed strongly with a 81% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Like most companies, Nederman Holding does come with some risks, and we've found 3 warning signs that you should be aware of.

While Nederman Holding 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. 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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