Stock Analysis

NSL's (SGX:N02) Returns On Capital Tell Us There Is Reason To Feel Uneasy

SGX:N02
Source: Shutterstock

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into NSL (SGX:N02), we weren't too upbeat about how things were going.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for NSL, this is the formula:

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

0.0027 = S$1.4m ÷ (S$608m - S$96m) (Based on the trailing twelve months to June 2021).

Therefore, NSL has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 10%.

See our latest analysis for NSL

roce
SGX:N02 Return on Capital Employed October 16th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for NSL's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of NSL, check out these free graphs here.

What Does the ROCE Trend For NSL Tell Us?

There is reason to be cautious about NSL, given the returns are trending downwards. To be more specific, the ROCE was 0.4% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on NSL becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that NSL is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 11% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with NSL (including 1 which 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.

Valuation is complex, but we're helping make it simple.

Find out whether NSL is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.