Novotek (STO:NTEK B) Might Become A Compounding Machine

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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Novotek (STO:NTEK B) looks attractive right now, so lets see what the trend of returns can tell us.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Novotek is:

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

0.22 = kr41m ÷ (kr294m - kr108m) (Based on the trailing twelve months to June 2022).

Therefore, Novotek has an ROCE of 22%. While that is an outstanding return, the rest of the IT industry generates similar returns, on average.

Check out the opportunities and risks within the SE IT industry.

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'd like to look at how Novotek has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Novotek's ROCE Trending?

In terms of Novotek's history of ROCE, it's quite impressive. The company has employed 123% more capital in the last five years, and the returns on that capital have remained stable at 22%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.

The Bottom Line

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. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing, we've spotted 2 warning signs facing Novotek that you might find interesting.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.