Novus Holdings (JSE:NVS) May Have Issues Allocating Its Capital

What financial metrics can indicate to us that a company is maturing or even 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. 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.

Understanding 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. Analysts use this formula to calculate it for Novus Holdings:

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).

So, 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 21%.

See our latest analysis for Novus Holdings

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

What The Trend Of ROCE Can 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. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Novus Holdings to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that Novus Holdings is generating lower returns from the same amount of capital. Unsurprisingly then, the stock has dived 78% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 3 warning signs with Novus Holdings (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

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