Is Novus Holdings (JSE:NVS) Set To Make A Turnaround?

What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Novus Holdings (JSE:NVS), we've spotted some signs that it could be struggling, so let's investigate.

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 Novus Holdings, this is the formula:

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

0.016 = R39m ÷ (R3.0b - R567m) (Based on the trailing twelve months to September 2020).

Therefore, Novus Holdings has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 20%.

View our latest analysis for Novus Holdings

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 want to delve into the historical earnings, revenue and cash flow of Novus Holdings, check out these free graphs here.

What Does the ROCE Trend For Novus Holdings Tell Us?

We are a bit worried about the trend of returns on capital at Novus Holdings. Unfortunately the returns on capital have diminished from the 22% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Novus Holdings to turn into a multi-bagger.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. We expect this has contributed to the stock plummeting 87% during the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 2 warning signs for Novus Holdings (1 is potentially serious) you should be aware of.

While Novus Holdings 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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