Here's What Novotek's (STO:NTEK B) Strong Returns On Capital Mean

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Ergo, when we looked at the ROCE trends at Novotek (STO:NTEK B), we liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Novotek, this is the formula:

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

0.21 = kr39m ÷ (kr281m - kr100m) (Based on the trailing twelve months to March 2021).

Thus, Novotek has an ROCE of 21%. In absolute terms that's a great return and it's even better than the IT industry average of 16%.

See our latest analysis for Novotek

Historical performance is a great place to start when researching a stock so above you can see the gauge for Novotek's ROCE against it's prior returns. If you're interested in investigating Novotek's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Novotek deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 21% and the business has deployed 112% more capital into its operations. Now considering ROCE is an attractive 21%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

Our Take On Novotek's ROCE

In summary, we're delighted to see that Novotek has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 233% return to those who've held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you want to continue researching Novotek, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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