Returns On Capital At Natuzzi (NYSE:NTZ) Have Hit The Brakes

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Natuzzi (NYSE:NTZ), we don't think it's current trends fit the mold of a multi-bagger.

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

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

0.0064 = €1.3m ÷ (€400m - €202m) (Based on the trailing twelve months to March 2022).

So, Natuzzi has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 16%.

Check out our latest analysis for Natuzzi

Historical performance is a great place to start when researching a stock so above you can see the gauge for Natuzzi's ROCE against it's prior returns. If you'd like to look at how Natuzzi 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 Natuzzi's ROCE Trend?

Things have been pretty stable at Natuzzi, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Natuzzi to be a multi-bagger going forward.

On a side note, Natuzzi's current liabilities are still rather high at 51% of total assets. 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.

What We Can Learn From Natuzzi's ROCE

In a nutshell, Natuzzi has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 29% over the last five years, investors may not be too optimistic on this trend improving either. 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.

One more thing to note, we've identified 1 warning sign with Natuzzi and understanding it should be part of your investment process.

While Natuzzi may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.