Capital Allocation Trends At New Nordic Healthbrands (STO:NNH) Aren't Ideal

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at New Nordic Healthbrands (STO:NNH) 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. The formula for this calculation on New Nordic Healthbrands is:

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

0.14 = kr17m ÷ (kr252m - kr127m) (Based on the trailing twelve months to March 2022).

Therefore, New Nordic Healthbrands has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.6% generated by the Personal Products industry.

Check out our latest analysis for New Nordic Healthbrands

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how New Nordic Healthbrands has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From New Nordic Healthbrands' ROCE Trend?

On the surface, the trend of ROCE at New Nordic Healthbrands doesn't inspire confidence. To be more specific, ROCE has fallen from 29% over the last five years. However it looks like New Nordic Healthbrands might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, New Nordic Healthbrands has decreased its current liabilities to 50% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line On New Nordic Healthbrands' ROCE

Bringing it all together, while we're somewhat encouraged by New Nordic Healthbrands' reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

New Nordic Healthbrands does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.