If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in Napco Security Technologies' (NASDAQ:NSSC) returns on capital, so let's have a look.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Napco Security Technologies:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = US$16m ÷ (US$102m - US$14m) (Based on the trailing twelve months to March 2020).
So, Napco Security Technologies has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 10% generated by the Electronic industry.
In the above chart we have a measured Napco Security Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Napco Security Technologies.
What Does the ROCE Trend For Napco Security Technologies Tell Us?
Investors would be pleased with what's happening at Napco Security Technologies. Over the last five years, returns on capital employed have risen substantially to 19%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 67%. So we're very much inspired by what we're seeing at Napco Security Technologies thanks to its ability to profitably reinvest capital.
Our Take On Napco Security Technologies' ROCE
All in all, it's terrific to see that Napco Security Technologies is reaping the rewards from prior investments and is growing its capital base. And a remarkable 352% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing to note, we've identified 2 warning signs with Napco Security Technologies and understanding these should be part of your investment process.
While Napco Security Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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