Our Take On The Returns On Capital At Nordic Group (SGX:MR7)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Nordic Group (SGX:MR7) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Nordic Group is:

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

0.044 = S$4.4m ÷ (S$166m - S$67m) (Based on the trailing twelve months to June 2020).

Therefore, Nordic Group has an ROCE of 4.4%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 1.9%.

See our latest analysis for Nordic Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Nordic Group's ROCE against it's prior returns. If you'd like to look at how Nordic Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Nordic Group's ROCE Trending?

On the surface, the trend of ROCE at Nordic Group doesn't inspire confidence. To be more specific, ROCE has fallen from 13% over the last five years. However it looks like Nordic Group 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Another thing to note, Nordic Group has a high ratio of current liabilities to total assets of 40%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

To conclude, we've found that Nordic Group is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 71% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing Nordic Group we've found 4 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Nordic Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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