What Do The Returns At Premium Snacks Nordic (NGM:SNX) Mean Going Forward?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Premium Snacks Nordic (NGM:SNX) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Premium Snacks Nordic, this is the formula:

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

0.018 = kr1.5m ÷ (kr152m - kr66m) (Based on the trailing twelve months to June 2020).

So, Premium Snacks Nordic has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Food industry average of 8.3%.

Check out our latest analysis for Premium Snacks Nordic

Above you can see how the current ROCE for Premium Snacks Nordic compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Premium Snacks Nordic here for free.

What Can We Tell From Premium Snacks Nordic's ROCE Trend?

We're delighted to see that Premium Snacks Nordic is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 1.8% which is a sight for sore eyes. Not only that, but the company is utilizing 817% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, Premium Snacks Nordic's current liabilities are still rather high at 43% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Premium Snacks Nordic's ROCE

In summary, it's great to see that Premium Snacks Nordic has managed to break into profitability and is continuing to reinvest in its business. Astute investors may have an opportunity here because the stock has declined 36% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Like most companies, Premium Snacks Nordic does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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