What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. So on that note, NCS Multistage Holdings (NASDAQ:NCSM) looks quite promising in regards to its trends of return on capital.
Understanding 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 NCS Multistage Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0043 = US$574k ÷ (US$153m - US$19m) (Based on the trailing twelve months to March 2020).
Thus, NCS Multistage Holdings has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 5.7%.
Above you can see how the current ROCE for NCS Multistage Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for NCS Multistage Holdings.
The Trend Of ROCE
It's great to see that NCS Multistage Holdings has started to generate some pre-tax earnings from prior investments. The company was generating losses four years ago, but now it's turned around, earning 0.4% which is no doubt a relief for some early shareholders. In regards to capital employed, NCS Multistage Holdings is using 59% less capital than it was four years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. NCS Multistage Holdings could be selling under-performing assets since the ROCE is improving.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 13% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
What We Can Learn From NCS Multistage Holdings' ROCE
In the end, NCS Multistage Holdings has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has dived 97% over the last three years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.
Like most companies, NCS Multistage Holdings does come with some risks, and we've found 3 warning signs that you should be aware of.
While NCS Multistage Holdings 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.
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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