Slowing Rates Of Return At NVE (NASDAQ:NVEC) Leave Little Room For Excitement

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at NVE (NASDAQ:NVEC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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 NVE, this is the formula:

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

0.18 = US$13m ÷ (US$73m - US$1.0m) (Based on the trailing twelve months to March 2021).

So, NVE has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 11% generated by the Semiconductor industry.

View our latest analysis for NVE

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how NVE has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is NVE's ROCE Trending?

Over the past five years, NVE's ROCE has remained relatively flat while the business is using 28% less capital than before. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. You could assume that if this continues, the business will be smaller in a few year time, so probably not a multi-bagger.

The Bottom Line On NVE's ROCE

It's a shame to see that NVE is effectively shrinking in terms of its capital base. Since the stock has gained an impressive 63% over the last five years, investors must think there's better things to come. 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'd like to know about the risks facing NVE, we've discovered 1 warning sign that you should be aware of.

While NVE 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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